Saturday, April 18, 2009

Ilargi: I’ll say nothing today, and instead urge you to read the opening article by Stephen Lendman, which deserves all the attention we can give it. Yes, the title is provocative, but what really counts is the excellent run-down of information he provides.

Since taking office, Obama, wittingly or otherwise, has headed the largest criminal enterprise in history — the mass looting of national wealth to enrich his Wall Street benefactors. He assembled a rogue economic team of Clinton/Robert Rubin retreads — to fix the current crisis they engineered. In a March 13 article, (author and former Republican strategist) Kevin Phillips called them “recycled senior (Clinton administration) Democrats (responsible for the) tech mania, deregulation binge and (1997-2000) stock market bubble and crash. (Obama) extend(ed) the (disastrous) mismanagement and pro-Wall Street bias of the 2008 Bush regime bailout.”

He called Geithner and Bernanke “hapless,” the result of their ruinous misjudgments (and, along with Alan Greenspan, complicit) with finance-sector malfeasance.” He said Summers will be “remembered for helping to block federal regulation of financial derivatives and orchestrat(ing) the 1999? Glass-Steagall repeal, among his other “achievements.” He went down the list of key economic officials and trashed them all as the very types to be avoided, not appointed. He noted that Bernanke was chairman of George Bush’s Council of Economic Advisers and added: “Imagine if FDR had retained Herbert Hoover’s chief economic advisor and loyal Republican Fed Chairman in 1933….To think that the pussycat Fed (would become) a saber-toothed tiger is a deception.”

Worse still, ruinous economic policies “could prove fatal” if White House policies favor “Wall Street but not the national economy or American people” — the very direction they’ve now taken. In a follow-up April 7 article, Phillips highlighted “The Disaster Stage of US Financialization…a much grander-scale disaster than anything that happened in 1929 - 1933. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland.”

Today’s crisis represents “the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the US economy by a rabid financial sector…” It’s realigning global power with America losing its economic leadership won in WW II. “The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the US financial sector and its political and regulatory allies deserve this time.” Financialized America radically transformed the country, now “doubly staggering because of the crushing burden of its collapse.” Yet major media pundits and reporters barely noticed and now claim relief is just a few quarters away — ignoring a metastasizing cancer, a national disaster, while policy makers heap fuel on a raging blaze now consuming us, yet too little public rage confronts them.

Economics Professor William Black is a former senior bank regulator and Savings and Loan prosecutor, currently teaching economics and law at the University of Missouri. In an April 13 Barrons interview, he referred to “failed bankers (advising) failed regulators on how to deal with failed assets” they all had a hand in creating and proliferating. His conclusion: “How can it result in anything but failure.” He called the scale of financial fraud “immense,” and said “Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama’s presidency,” besides what it’s doing to the country, global economies, and many millions of people here and abroad.

He scathed Summers and Geithner, both “important architects of (today’s) problems,” and the latter as a failed and dishonest regulator, yet “numbering himself among those who convey tough medicine when he’s really pandering to the interests of a select group of banks.” No need to mention which ones. The law mandates corrective action, the kind FDR took in the 1930s. He, Bernanke and Summers flout the law, “in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent.” They’ve turned taxpayers into “suckers” who’ll pay dearly for decades, maybe generations.

His refusal to put insolvent banks into receivership, resorting to deceptive language like “legacy assets,” and pursuing the worst of Chicago School economics “is positively Orwellian….If cheaters prosper, (they’ll) dominate. It’s like Gresham’s law: Bad money drives out the good. Well, bad behavior” does the same thing “without good enforcement.” His bailout plans are disastrous. They prop up zombie banks by “mispricing toxic assets….The last thing we need is a further drain on our resources…by promoting this toxic asset market (and notions of) too-big-to-fail.” With most, perhaps all, the big banks insolvent (a polite term for bankrupt), what’s going on is “a multi-trillion dollar cover-up by publicly traded (enterprises), which amounts to felony securities fraud on a massive scale.”

Ultimately, these firms will be forced into receivership, their “managements and boards stripped of office, title, and compensation.” What’s needed is a 1930s-style Pecora investigation to get to the bottom of their fraud, deceit, and cover-up, along with government complicity to hide it. More on that below. Black cited billions to AIG as the single worst abuse so far to bail out their counterparties like Switzerland’s UBS at the same time we were prosecuting it for tax fraud. As bad was following Goldman Sachs’ advice to direct a $13 billion counterparty windfall to itself. The whole process reeks of corruption. It must be stopped, and a new direction instituted under a reformist economic team — one that will admit the nature and depth of the problem, cut the tie to Wall Street, and take corrective action the law mandates. That’s “precisely what isn’t happening.”

Washington is “wedded to the bad idea of bigness” and power of Wall Street. In today’s America, financialization is predominant. It’s a cancer eating away at the fabric of the nation and many millions affected, the result of the grandest of grand thefts. A good start would be to break up the financial giants into more effectively managed and less powerful units — maybe the way Standard Oil was dismantled through a simple share spinoff. In addition, “a new seriousness must be put into regulation,” and a new resolve to enforce it.

Today, the whole system encourages fraud, one based on results at any cost, so “fudging the numbers” becomes de rigueur and global bigness the holy grail. It sends the wrong message: play or pay with your job and future on Wall Street. “The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that.” It’s been decades since we’ve been there and high time we took it seriously. Job one is a thorough housecleaning and new direction, much like what’s described below. On April 3, Black appeared on Bill Moyers Journal on PBS and explained what’s briefly enumerated below. From his experience as a regulator and prosecutor, he said:

fraud is initiated in boardrooms and CEO offices by making “really bad loans, because they pay better;”

then grow them like a Ponzi scheme multiplied through leverage; it’s hugely profitable early on, then inevitably creates “disaster down the road;”

dismantling regulation makes it possible;

one scheme was subprime, Alt-A , and even prime “liars’ loans” - meaning no checks are made on income, jobs, ability to repay, and the more they’re inflated the more profitable they are; the amount of them was enormous - for one company alone, they generated as many losses as the entire S & L scandal;

toxic products were willfully created to scam borrowers for big profits;

rating agencies went along by appraising junk as AAA instead of doing it honestly;

in September 2004, the FBI warned about a mortgage fraud epidemic, but nothing was done to stop it; so now we have a crisis hundreds of times greater than the S & L one and bad policy in play to address it;

as in Barrons, he accused top Bush and Obama officials of a cover-up - to conceal the insolvency of all major banks and by so doing broke the law established after the S & L crisis, the Prompt Corrective Action Law that mandates insolvent banks be shut down and/or placed in receivership; and

this is the greatest financial scandal in history - swept under the rug by top government officials of both parties; it’s legally and morally indefensible, and it’s wrecking the country.

In an April 6 article, Black calls ongoing “stress tests a complete sham…to fool people…make us chumps” and essentially say ‘If we lie and they believe us, all will be well” when, in fact, it’s not. It’s part of the giant cover-up and greatest ever criminal fraud - by bankers and complicit government officials. On April 13, Nouriel Roubini shared Black’s view. He cited the stress test “spin machine” leaking stories to the press that all 19 banks in question will pass. None will fail. If more “exceptional assistance” is needed, Washington will provide it. However, Q 1 macro data tells another story as growth, unemployment, and falling home prices alone “are worse than those in FDIC’s baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009.

Thus, the stress test results are meaningless” as worsening data are outdistancing “the worst case scenario.” In other words, test results “are not worth the paper (they’ll be) written on” as their assumptions are fraudulently based. They’re “fudge tests…blatantly rigged” to put a brave face on a very bleak economic picture. They’re in addition to other changes, including the recent Financial Accounting Standards Board (FASB) ruling. It’s responsible for developing “generally accepted accounting principles” known as GAAP. On April 3, it changed so-called “mark-to-market” standards to “mark-to-make believe” ones. It also voted to allow banks to book smaller impaired asset losses to paint a brighter profits picture. It let Wells Fargo, for example, claim a Q 1 profit when it’s drowning in losses, ones it can hide and not take.

Also likely coming is restoration of the “uptick rule” that prohibited short-selling in a down market. Established in 1938 to prevent disorderly selling, it allows shorts only when shares trade up. In June 2007, it was removed. Re-introductory proposals are now being considered to artificially boost prices. Roubini calls it “a form of legalized manipulation of the stock market by regulators…to prevent short-sellers (from doing) their job, i.e. make stock prices reflect fundamentals and prevent bubbles.” Overall, alarm bells should be warning about reckless monetary and fiscal policies, but perverse market reaction was relief that’s wildly premature according to some like Roubini. Others see a protracted downturn, a prolonged winter, and if conditions deteriorate enough perhaps a nuclear one, unlike anything before seen, and why not:

why does a large one, like the dot.com bubble, do no damage to the financial system while another (housing) caused collapse?

They believe “events of the past 10 years have an eerie similarity to the period leading up to the Great Depression,” including rising mortgage debt and speculation, then asked: Had banking system difficulties “been caused by losses on brokers loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash.” But they weren’t apparent until fall 1930, a year later. Further, if money supply contraction caused bank failures, why haven’t massive infusions today prevented the crisis? They conclude that conventional wisdom needs reassessing and believe “excessive consumer debt — especially mortgage debt — was transmitted into the financial sector” causing the Great Depression.

Their hypothesis “is that a financial crisis (originating) in consumer debt, concentrated at the low end of the wealth and income distribution (affecting so many households), can be transmitted quickly and forcefully into the financial system…we’re witnessing the second great consumer debt crash, the end of a massive consumption binge,” but want more study to prove it. However, much more than that is needed - real reform, a complete reversal from current policy of the kind addressed below. Also, Smith and Gjerstad omitted a crucial fact - how misdirected today’s massive infusions have been. Instead of helping beleaguered households, they’ve gone mostly to bankers for purposes other than economic recovery; namely, recapitalizations, for acquisitions, and big bonuses at the same time they fire thousands of lower level staff.

The 1930s Pecora Commission On March 4, 1932 (one year to the day before FDR took office), a majority-Republican Senate Banking, Housing, and Urban Affairs Committee established it to investigate the causes of the 1929 crash. It was little more than a fig leaf until Democrats took over, appointed Ferdinand Pecora as special counsel, and made a real effort for banking and regulatory reform. Straightaway, Pecora looked into Wall Street’s seamy underside by placing powerful bankers in the dock, holding them accountable for their actions, and doing through hearings what would have been impossible in open court given their ability to “buy” justice. He confronted Wall Street’s biggest names:

Richard Whitney, president of the New York Stock Exchange;

noted investment bankers, including Thomas Lamont, Otto Kahn, Charles E. Mitchell, Albert Wiggin, and JP Morgan, Jr., scion of the man who dominated the Street for decades as its boss and de facto Fed chairman before the central bank was established; and

market speculators like Arthur Cutten.

He got Morgan to admit that he and his 20 partners paid no income taxes in 1931 and 1932. Neither did its Philadelphia operation, Drexel and Co., in the same years and way underpaid them in previous ones. It made headlines, was stunning, and galvanized critics to demand reform. Pecora went further. He questioned Morgan and others on various matters, including sweetheart deals for political figures and insider ones for Wall Street cronies, similar shenanigans to today but not on the same scale, and under a president then who cared once Roosevelt took office. He directed “pitiless publicity” on Street corruption, what they easily got away with under Republicans.

Pecora was a former New York district attorney, an Eliot Spitzer-type with a reputation for toughness and fearlessness, but one serving at the behest of the President. He established straightaway that some of Wall Street’s most powerful lied to their shareholders, manipulated stocks to their advantage, and profited hugely through malfeasance. Roosevelt encouraged him in his March 4, 1933 inaugural address saying:

"...there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency….the rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence, have admitted their failure and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men…

They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish. The money changers have fled their high seats in the temple of our civilization. We must now restore that temple to the ancient truths. (Doing it requires) apply(ing) social values more noble than mere monetary profit."

Imagine Obama saying this, followed by strong policies for enforcement under Roosevelt-style officials. Men like Pecora who asked tough questions and demanded answers, including on the House of Morgan’s operations, something unimaginable today under any leadership. Morgan’s counsel, John W. Davis, called Pecora’s questions outrageous, but Morgan had to answer in detail enough to shake the “secret government’s” foundations. Pecora’s staff examined company records that revealed financial manipulations among the Street’s powerful to reap enormous profits — enough for Morgan to gain control of most US industry, buy politicians and diplomats, and effectively control the most powerful banks in the country. Years later in his book, Wall Street Under Fire, Pecora wrote:

“Undoubtedly, this small group of highly placed financiers, controlling the very springs of economic activity, holds more real power than any similar group in the United States.” Morgan called it performing a “service” and exercising no more control than through “argument and persuasion.”

His managing partner, Thomas Lamont, told the committee that the firm only offered advice that clients could accept or reject. Pecora learned otherwise as he peeled away the layers of company power and influence. He discovered “preferred clients” and friends of the bank lists in two tiers - special allies, operatives, and cronies and a “fishing list” from which new ones were recruited. In total, it showed Morgan was more powerful than Washington — that the firm effectively controlled a network of companies that made US financial policy for over three decades plus leading politicians and much of the federal bench. Pecora discovered what’s as true today: that a select group of giant banks run things.They set policy, rig the game to their advantage, buy politicians the way Morgan did, and pretty much run the country and the world. Again Pecora from his book:

"Morgan’s power was “a stark fact. It was a great stream that was fed by many sources; by its deposits, by its loans, by its promotions, by its directorships, by its pre-eminent position as investment bankers, by its control of holding companies which, in turn, controlled scores of subsidiaries, and by its silken bonds of gratitude in which it skillfully enmeshed the chosen ranks of the ‘preferred lists.’ It reached into every corner of the nation and penetrated in public, as well as business affairs. The problems raised by such an institution go far beyond banking regulation in the narrow sense. It might be a formidable rival to the government itself.“

Pecora proceeded from Morgan to others, powerful bankers in their own right like Kuhn+Loeb’s Otto Kahn. Roosevelt championed the hearings and from them came legislative reforms, the kinds so desperately needed now but nowhere in sight by an administration totally subservient to money and power and thoroughly corrupted by them - after a scant three months in office.

Congressional Oversight Panel (COP) Calls for Sweeping ChangesIts head, Elizabeth Warren, called on the Treasury to get tough on TARP recipients, including:

questioning the “dangers inherent” in its strategy; the idea of “open-ended subsidies (to giant institutions) without adequately weighing potential pitfalls;”

acknowledging that it has no historical precedent and faint hope of succeeding;

leveraging the $700 billion in TARP funds well beyond what Congress appropriated - to an amount exceeding $4 trillion and smacking of high-level corruption;

firing top executives of failed institutions like Citigroup, Bank of America and AIG; “the very notion that anyone would infuse money into a financially troubled entity without demanding (management) changes is preposterous;”

shareholders to be wiped out; “it is crucial (for this) to happen;”

choosing among three alternatives for insolvent banks: “liquidation, receivership, or subsidization;” Geithner’s plan is none of the above and essentially unworkable; it fails to acknowledge the decline’s depth and degree to which troubled assets low valuations accurately reflect their worth;

if the downturn gets greater than forecast, “very different actions” will be needed “to restore financial stability.”

Given the extent and long-term nature of today’s crisis, it’s shocking that bad policy practically assures the worst outcome. Maybe a government/Wall Street cabal prefers it to capitalize on the wreckage at fire sale prices, at home and globally, as part of a long-term process of sucking wealth to the top while ignoring its fallout, both human and economic. Those calculations don’t enter their sophisticated models, only bottom line ones they can bank on.

Other Bank Bailout Critics Willem Buiter was a former member of the Bank of England’s Monetary Policy Committee (1997 - 2000). He now has a Maverecon blog and is a Financial Times (FT) regular. He’s also a fierce critic of bank bailouts, a policy he says wastes good time and money and is destined to fail.“The good bank solution and slaughter of the unsecured creditors should have been pursued actively as soon as it became clear that most (US international banks were) insolvent.” Soon enough it will be apparent anyway, before year end. “At that point, (their) de facto insolvency will be so self-evident that even the joint and several obfuscation of banks and Treasury will be unable to deny the obvious.” And they’ll be no fiscal resources to the rescue. “The likelihood of Congress voting even a nickel in additional financial support for the banks is zero.”

Joseph Stiglitz was even blunter in an April 17 Bloomberg interview headlined: “Stiglitz Says White House Ties to Wall Street Doom Bank Rescue.” He accused the administration of bailing out bankers at the expense of the economy. “All the ingredients they have so far are weak, and there are several missing” ones. The people who created this monster are “either in the pocket of the banks or they’re incompetent.” “We don’t have enough money, they don’t want to go back to Congress, they don’t want to do it in an open way, and they” won’t act responsibly and place the banks in receivership where they belong and let shareholders, not taxpayers take the pain. This policy guarantees failure. It’s “an absolute mess.” It’s a strategy to re-inflate a bubble that will do nothing to speed recovery. “It’s a recipe for Japanese-style malaise.”

Financial expert and investor safety advocate Martin Weiss is most critical of all. He calls bank stress tests “FLIM-FLAM” in accusing Washington of hiding the true condition of the nation’s 19 largest banks. Key economic indicators like GDP contraction and unemployment are far worse than stress test parameters. “Our own government is clearly cooking the books — using (false) criteria to deceive you; hoping you’ll trust banks that are clearly hanging by a thread.” On May 4, they’ll announce the results — jerry-rigged to present an illusion of solvency, but clearly a deceptive lie. The economy is sinking, not stabilizing, let alone recovering. The administration is bailing out bankers while wrecking the economy and millions of households. Why isn’t Washington addressing the tough questions, he asks. Because the answers have them “terrified,” so they play for time while home foreclosures are exploding, factories are sitting idle, consumption keeps falling, yet they hope conditions will improve. No one asks:

what if states and cities can’t provide vital services;

hospitals have to close down “due to disruptions in insurance payments;”

“supermarket shelves are emptied because trucking companies can’t get short-term loans to stay in business;”

utilities “are crippled as the crisis kills the revenues they count on from corporations;” and

“soaring deficits drive interest rates sky-high and gut the dollar, driving the cost of living through the roof.”

What if one day we discover America is no longer America. What if we realize that day is today.

Another Day, Another SchemeThe latest one lets ordinary people participate in Geithner’s Public-Private Partnership Program (PPIP) that sounds suspiciously like “liars’ loan” fraud, except this time “investments” in worthless junk are involved that will separate fools from their money. The New York Times headlined the plan by comparing it to WW I Liberty Bonds that helped the country win the war. Now it’s “to come to the aid of their banks — with the added inducement of possibly making some money…” The idea is for “large investment companies to create the financial-crisis equivalent of war bonds: bailout funds” to sucker the unwary to “invest” and, simultaneously, quiet opposition to the handouts.

According to money management firm BlackRock director Steven Baffico: “It’s giving the guy on Main Street an equal seat at the table next to the big guys.” Pimco’s Bill Gross called it a “win-win-win policy.” Absolutely for him so he loves it. Plans are still being discussed. They won’t likely be announced for several months, but already the scheme is apparent. It’s to offload toxic junk on the public, let unwary investors take losses, relieve troubled banks of more of them, and arrange for investment fund issuers (like Pimco and BlackRock) to reap healthy fees if enough suckers can be enlisted to go along.

As troublesome is FDIC’s role in the scam — through its transformation from insuring depositors to a much greater one guaranteeing over $1 trillion in junk assets, way over its charter $30 billion limit by twisting the rules to arrange it. Its charter allows extraordinary steps to be taken when an “emergency determination by secretary of the Treasury” is made to mitigate “systemic risk.” However, its Section 14 Borrowing Authority states:

“The Corporation is authorized to borrow from the Treasury…for insurance purposes (not speculation, bailouts, or other schemes, an amount) not exceeding in the aggregate $30,000,000,000 outstanding at any one time….Any such loan shall be used by the Corporation solely in carrying out its functions with respect to such insurance (of bank deposits, then up to $5000, now temporarily at $250,000)…”

“Before issuing an obligation or making a guarantee, the Corporation shall estimate the cost of such obligations (as well as market value)…the Corporation may not issue or incur any obligation, if, after (so doing) the aggregate amount of obligations of the Deposit Insurance Fund (exceeds) the total of the amounts authorized ($30 billion under) section 14(a).”

PPIP violates FDIC rules. If it’s opened to the public, greater fraud will result with ordinary people hit hardest as usual, the best reason to avoid this and alert others to be as prudent. It’s another dubious scheme to separate the unwary from their money and redirect it to the top - to the same fraudsters responsible for the crisis and their investment company partners going along with the scam. The Treasury extended the deadline for PPIP participants (to April 24) and loosened some of its guidelines, suggesting that investor support has been less than expected. However, on April 2, the Financial Times (FT) headlined: “Bailed-out banks eye toxic asset buys.” Giants like JP Morgan Chase, Citigroup, Bank of America, and Goldman Sachs “are considering buying (each other’s) toxic assets,” and why not when it’s a win-win way to offload each other’s junk, do it at inflated prices, and stick taxpayers with the risk.

New York University’s Stern School of Business Professor Lawrence White put it this way: “I’m worried about the following scenario: You and I have troubled assets, I buy assets from you, you buy them them from me, and at the end of the day it (looks) suspiciously like you bought assets from yourself” with Treasury funds. PPIP prohibits banks from buying their own assets but lets them do it from other firms, either directly or through investment funds set up for that purpose, and according to Treasury: “It’s an open program designed to get markets going.”

On April 3, Reuters reported that “US regulators may be open to letting TARP recipients participate in the new program,” and already Goldman Sachs and Morgan Stanley suggested they’ll do it. Others expressed interest in what some observers call a giant money laundering scheme compounding the colossal flimflam that in the end most likely won’t work — except to extract multi-trillions from the public to banksters with Washington acting complicitly as transfer agent. Meanwhile economic fundamentals are deteriorating at depression-level speed and depth while Obama remains in denial. On April 2 at the G 20, he cited “a very productive summit that will be, I believe, a turning point in our pursuit of global economic recovery” when, in fact, it produced nothing beyond the usual hype - plus this time the quadrupling of the IMF’s budget to inflict debt bondage on its willing partakers.

We’re clearly in early stage unchartered waters of what Michel Chossudovsky calls “The Great Depression of the 21st Century” heading America for “fiscal collapse” because of policies amounting to “the most drastic curtailment in public spending in American history” - directing most of it for militarism and foreign wars, Wall Street bailouts, and half a trillion for public debt service. In an April 12 commentary, longtime, well-respected Chicago financial journalist Terry Savage headlined “Social Security Myth” in reporting on some of the fallout. Someone has to pay for “fixes” and militarism, that someone is us, and target one is Social Security. According to Savage:

“Most likely, Social Security will become a “needs-based” payout to low income, elderly recipients - not a return of the ‘investments’ you made with all those FICA deductions from your pay check every month over your working career.” In other words, Washington intends to renege on the 74-year old promise FDR announced to the nation on August 14, 1935: “Today a hope of many years’ standing is in large part fulfilled….This social security measure gives at least some protection to thirty millions of our citizens (now over 56 million, including Supplement Security Income recipients) who will reap direct benefits….This law represents a cornerstone in a structure….by no means complete.

(It) will take care of human needs and at the same time provide the United States an economic structure of vastly greater soundness. (The passage of this bill marks) a historic (achievement) for all time.” It’s now in jeopardy, so here’s what Savage advises. Prepare. “Save more money, (and) start from an honest assessment” of what’s coming. What FDR gave will be taken away. “And that’s The Savage Truth.” A disturbing and outrageous one as well as all the other ways we’ve been betrayed.

Barney Frank's track record as a financial analyst is, shall we say, mixed. The House Financial Services Chairman said for years that a collapse of Fannie Mae and Freddie Mac would pose zero risk to taxpayers. For most people, a mistake of that magnitude would trigger introspection, if not humility. But not the sage of Massachusetts. He's cooking up another fantastic subsidy -- and like the last one, he swears taxpayers won't feel a thing. In his words, "it would cost the federal government zero." Uh oh.

Mr. Frank believes state and local governments are paying too much when they issue debt because rating agencies don't give them the ratings Mr. Frank feels they deserve. So last year he pushed a bill to effectively force Standard &Poor's, Moody's and Fitch to raise their ratings on municipal bonds, but the legislation got sidetracked amid the financial turmoil. Now Mr. Frank is back, bigger than ever. He'd like to create what he calls an FDIC-like federal insurance program for municipal bonds. Jurisdictions issuing debt would pay premiums into the insurance fund, and in return the federal government would guarantee the debt against default.

Private companies already insure municipal bonds -- companies such as MBIA, Ambac and Berkshire Hathaway. And you may recall that last year the big bond insurers caused considerable angst when their exposure to mortgage-related debt called into question their ability to meet their muni-bond obligations. MBIA, in response, recently fenced off its muni-bond business from its other obligations. If Mr. Frank really believes that state and local governments have been forced to overpay for this insurance, one has to assume his federal program would charge lower premiums and so undercut its private-sector competitors. The government can charge low premiums without putting taxpayers on the hook, he argues, because the risk of default is so low.

Or is it? The payment history of municipal bonds seems to support Mr. Frank. But then the triple-A ratings assigned to many mortgage-backed securities were also based on backward-looking models that failed to anticipate today's housing bust. The muni-bond performance record is also mostly the history of uninsured bonds. But the very existence of insurance can change the behavior of the policyholder or beneficiary -- watch Barbara Stanwyck and Fred MacMurray in the 1944 classic "Double Indemnity." If a state or locality knows someone else will make bondholders whole, they are far more likely to default than an uninsured issuer would be.

Many states and localities have run up huge pension and health-care obligations to retirees that will come due over the next few decades. And many of those obligations were underfunded even before the bottom fell out of the stock market. When those bills hit, cities will have to choose among raising taxes, cutting benefits or stiffing bondholders. In some states, such as New York, retiree benefits are constitutionally protected, and taxes are already chokingly high. So stiffing the bond insurers will look pretty attractive. None other than Warren Buffett devoted several pages in his latest Berkshire Hathaway shareholder letter to precisely this kind of risk: "When faced with large revenue shortfalls, communities that have all of their bonds insured will be more prone to develop 'solutions' less favorable to bondholders than those communities that have uninsured bonds held by local banks and residents."

He continues: "Losses in the tax-exempt arena, when they come, are also likely to be highly correlated among issuers. If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow. What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far-away bond insurer?" This goes double if the insurer is Uncle Sugar. Mr. Buffett concludes: "Insuring tax-exempts, therefore, has the look today of a dangerous business -- one with similarities, in fact, to the insuring of natural catastrophes. In both cases, a string of loss-free years can be followed by a devastating experience that more than wipes out all earlier profits."

The difference, in this case, is that bond insurance, and especially federal bond insurance, would have helped create the "natural" catastrophe by encouraging jurisdictions to rack up obligations that taxpayers would be forced to make good on down the road. As for Mr. Frank's contention that muni-bond insurance is too expensive, Berkshire Hathaway is charging two and three times historical rates -- and Mr. Buffett is still worried. One Fannie Mae debacle ought to be enough for any career, but Mr. Frank wants taxpayers to double down on his political guarantees. There are currently some $1.7 trillion in municipal bonds held by the public, and Barney thinks we can insure them at "zero cost." Considering the source, and the potential size of the bill, someone in Congress needs to sound the alarm.

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions. With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements, people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure. The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

"There are plenty of ways to go wrong here," said Wayne Abernathy, executive vice president of the American Bankers Association in Washington. "It might have sounded good at the time, but now looking back, it has far more risk than benefit." The banks haven’t been consulted on how the information will be released and have raised the issue with the Treasury, three industry officials said on condition of anonymity. The 19 firms include Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Goldman Sachs Group Inc., GMAC LLC and MetLife Inc. and other commercial, trust and regional banks. The Federal Reserve, OCC, Federal Deposit Insurance Corp. and Office of Thrift Supervision are using the tests to determine whether the 19 have enough capital to cover losses over the next two years should the economic downturn worsen.

Fed officials have pushed for the release of a white paper laying out the methodology of the assessments in an effort to bolster their credibility. The central bank has been leery of inserting politics into the examination process, two people familiar with the matter said. A statement on the methods is scheduled for release April 24. The Fed, the nation’s primary regulator of bank holding companies, is leading the tests. The 19 companies may get preliminary results as soon as April 24, a person briefed on the matter said. Regulators, all of which regularly administer exams to the lenders they oversee, have privately expressed concern about the tests and whether they will be effective, the two people said.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said. Geithner has said he crafted the stress test program in an effort to provide more transparency about the health of banks’ balance sheets. He and Fed Chairman Ben S. Bernanke have also noted that most of the 19 banks are currently well capitalized and that not all of them would need new capital. There have been signs this year of some recovery in the banking industry. Goldman Sachs said April 13 its earnings for the first quarter were $1.81 billion, or $3.39 a share, after a surge in trading revenue. The results were better than analysts’ expectations of $1.64 and the New York-based firm sold $5 billion in stock to help repay government capital injections.

Earlier this month, Wells Fargo & Co. said it would report net income of $3 billion, 50 percent more than the previous year’s period. The San Francisco-based bank said it closed $100 billion of mortgages in the quarter with an equal amount waiting to be finished, a signal that business is picking up. JPMorgan reported profit that beat analysts’ estimates on April 16, with first-quarter earnings of $2.14 billion, or 40 cents a share. Chief Executive Officer Jamie Dimon labeled the TARP program a "scarlet letter" and said the firm could repay the government "tomorrow." Still, not all banks are expected to be healthy enough to forgo the Treasury’s assistance, which along with additional capital injections could include converting previous government investments from preferred shares to common equity.

How the market handles the results is a chief worry of banks and regulators, said Scott Talbott, chief lobbyist for the Financial Services Roundtable in Washington. "The problem is you pick winners and losers," Talbott said. Banking lawyers and industry officials said that the Treasury needs to be very clear with the public about the reviews, which by their design test events that may not happen. Because of the intense interest from the media and investors, the government needs to "explain early and often" the purpose of the program, said the ABA’s Abernathy. "It’s very possible that we are seeing the turning of the corner for the banking industry," he said. "Our biggest fear is that it becomes a confidence-eroding episode at just the wrong time."

Ilargi: The "pessimistic scenario" used on the stress tests for banks is a crucial factor going forward. In it, unemployment rises to 8.9% by the end of 2009, and home prices fall an additional 22% for the same period. It's glaringly obvious that the pessimistic scenario is fat too optimistic. Unemployment is over 8.5% already, while home prices lost 19% from Jan. 2008-Jan. 2009. Clearly, worse secnario is needed to arrive at a test that has any value at all. But the resistance form the banks against such a scenario means it won't even be considered. Yes, the key word once again is confidence.

Results of the government stress tests government being conducting on the 19 largest financial institutions are expected to be released May 4, but industry lawyers argue that the release is likely to be less of an event that many observers have hoped. "What we will see is high-level capital ratios that show each bank is a viable institution at current conditions," said Jeffrey Hare, a partner at Alston & Bird LLP in Washington. "Bank regulators don't want to show something that could be misunderstood and create undue panic to the system." The stress tests are to determine whether each bank has sufficient capital reserves to cover loan losses over the next couple of years based on a series of economic projections for that period. Based on each stress test, Treasury and bank regulators will decide if the government needs to provide additional capital to the banks. The Office of the Comptroller of the Currency and the Federal Reserve are conducting the tests.

Those forecasts include a pessimistic scenario the Treasury released Feb. 25 under which the unemployment rate rises to 8.9% by the end of this year with home prices falling an additional 22% for the same period. However, many aspects of the negative scenario are, in fact, coming to pass. Joblessness rose to 8.5% by the end of March, and the Standard & Poor's/Case-Shiller Home Price Index, on which the Treasury Department's pessimistic housing scenario is based, indicated March 31 that home prices had fallen 19% in the 12 months ending in January. Alston & Bird's Hare said he believes that bank regulators are now using the pessimistic scenario as their baseline forecast. He expects the results released in early May to show that banks will be viable for the next two years using the new baseline forecast, with some recommendations that certain financial institutions take six months or less to raise private capital before seeking government funding, he said.

The Fed and other regulators are expected to publish a paper on their methodologies for the stress test on April 24, according to a banking source. It could provide more details about a more pessimistic scenario then. Fed officials did not return calls. However, regulatory attorneys believe that neither regulators nor the banks will provide the kind of details the markets and analysts want. Hare said he doesn't believe the government will publicly provide a breakdown of each bank's loan portfolio. "What markets were hoping to get -- specific details about each bank's viability if things get worse -- they're not going to get," said Hare. "The stress test will fail, [but] banks will pass." Nevertheless, regulatory analysts contend that government officials will have a thorough knowledge about each bank's capital composition, including loan portfolios and off-balance-sheet commitments, once they complete stress tests. Most of this information will be kept confidential, Hare said. Banks are expected to receive preliminary results of stress tests so they can make comments before the final results are provided.

Based on the confidential data and new pessimistic assumptions, bank regulators may quietly explain to bankers that they need to raise more capital. However, those discussions are likely to remain private, said Kenneth Lore, partner at Bingham McCutchen LLP in Washington. "You don't want to upset the capital markets with things that could be misconstrued," said Lore. "The Fed understands that you don't want to create winners and losers out of the results." Regulators may also press banks seeking state-funded capital to participate in other government programs as a condition on raising government funds. One possibility: only provide taxpayer capital injection to a bank if it agrees to sell some of its illiquid assets to a public-private fund being set up by Treasury.

Regulators hope to have the public-private fund up and operating a few weeks after the stress tests' results are released. Private investment-fund managers seeking to participate in the fund must send applications to Treasury by April 24. "We are working to get this up and running as soon as possible," said Treasury spokesman Andrew Williams. Treasury has roughly $134.5 billion in funds remaining as part of the $700 billion bank bailout legislation approved in October. More may be on the way. Both Goldman Sachs and J.P. Morgan plan to return to the government $10 billion and $25 billion in funds they respectively received in October as part of Treasury's Capital Purchase Program. J.P. Morgan's chief executive, Jamie Dimon, said April 16 he is waiting for instructions from government officials on returning the capital. Six smaller banks have returned capital to the fund.

Banks, though, are under pressure to disclose the results of their stress tests to shareholders. Banks are expected to sign capital-assistance documents upon the completion of the stress tests, explaining whether they are seeking out immediate government capital infusions or they plan to spend six months raising capital before re-evaluating. The signing of those documents could be a material agreement, which means banks must file an 8-K with the Securities and Exchange Commission, explaining what they've agreed to. "It's a material event," said Gary Roth, partner at Alston & Bird LLP in New York. "When banks are given their results, they would be under a lot of pressure to disclose. When one discloses, it puts pressure on the other banks to disclose." SEC officials are in discussions with bank regulators about disclosure responsibilities. "From the Treasury or Fed's perspective, you don't want the disclosures to be too diverse," said Dwight Smith, partner at Alston & Bird LLP in Washington.

The Treasury may retain an ownership interest in many U.S. banks even after the lenders buy back preferred stock the government currently holds as part of its rescue effort. The government will continue to hold warrants, attached to every capital injection it has made, even after any share buybacks, Treasury officials said on condition of anonymity. Banks seeking to escape the government’s grip want to retire the warrants -- which give the right to buy stock in the future at a preset price -- at the same time they acquire the government- owned preferred shares. The government counters that companies must follow the two-step process described in contracts.

The officials said the U.S. would give up the warrants only after subsequent talks with appraisers and the banks to agree on a price. As long as the warrants remain, lenders would continue to face some federal constraints, including limits on hiring non-American citizens, the officials said. Lenders would be freed of restrictions on executive pay and dividends, they said. "When this program was created, everything was done so fast, I don’t think people were contemplating they would be exiting this quickly," said Diane Casey-Landry, chief operating officer of the American Bankers Association. Escalating federal demands on the banks have spurred institutions including Goldman Sachs Group Inc. and JPMorgan Chase & Co. to seek an early exit from the Treasury’s rescue program. The warrants issue may be the latest complication in a $700 billion effort to unfreeze credit that has sparked an outcry among both lawmakers and some bankers.

The Treasury won’t hold onto the warrants longer than needed to complete the process outlined in contracts with the banks, said Andrew Williams, a spokesman for the department. "Treasury is abiding by the process defined in our investment agreements and will continue to do so," Williams said. "Any inference that we are slowing the process down is incorrect. Treasury is required by law to liquidate the warrants after repayment, and we obviously intend to honor this requirement." Most of the funds from the Troubled Asset Relief Program distributed so far have been used for buying stakes in financial companies. Warrants apply to all elements of TARP, and officials are still wrestling with how to include them in their plan to finance purchases of distressed assets. Treasury representatives are working with the Federal Deposit Insurance Corp. and potential participants in the toxic- debt programs on how to apply the warrants requirement.

Lawmakers pressed for warrants in the TARP law enacted in October as a way for taxpayers to benefit from future profits of companies getting help. When exercised, the government can buy newly issued shares from the company at a pre-determined price. It’s unclear how much the warrants may be worth and valuing them may prove contentious. Bankers said the warrants, under current market conditions, may turn out to be expensive for those looking to exit the rescue programs quickly. "If you look at the cost of those warrants and turn it into an annual percentage rate, it’s enormous," said Camden Fine, president of the Independent Community Bankers of America. "It almost makes the Treasury look like a payday lender."

Financial shares have rallied in the past month on signs that the industry’s performance improved in the first quarter. The Standard & Poor’s 500 Financials Index has soared more than 80 percent from its low of 78.45 on March 6, closing at 149.18 today. That’s still down about 70 percent from the high reached in May 2007. Goldman Sachs Chief Financial Officer David Viniar said in an April 14 interview that "there’s a prescribed process for how you do it -- where you propose a price, they accept or not, you negotiate and then you hire appraisers and come up with an agreed-upon valuation." "We’ll figure it out, we don’t know" the cost, Viniar said. Goldman Sachs raised $5 billion this week in a share sale in order to help pay back the $10 billion it took from the government in October. JPMorgan Chief Executive Officer Jamie Dimon said April 16 his firm could repay U.S. government rescue funds "tomorrow." He called the receipt of the $25 billion in TARP money last year "a scarlet letter." JPMorgan spokesman Joseph Evangelisti declined to comment on the warrants.

For the top 19 banks, any TARP repayments will have to wait until after the so-called stress tests conclude, a Treasury official said. U.S. regulators are reviewing the biggest banks to gauge whether they have enough capital to survive a deeper economic slowdown. A Federal Reserve official said yesterday that the results are planned for release May 4. To repay, a bank must apply to the Treasury. The request then goes to the bank’s regulators, who review the soundness of the institution. If the bank is deemed in good shape, it’s allowed to buy out the government stake. Some smaller banks are already in the process of repaying their TARP funds. Of the six who have repaid so far, five have outstanding warrants that need to be addressed. The sixth, Centra Financial Holdings Inc. of Morgantown, West Virginia, is a private bank. Treasury exercised its warrants when it bought the preferred shares, which the bank has now repaid.

Regulators on Friday shut down two more banks, boosting the number of failures this year to as many as in all of last year The tally of 25 bank failures this year all but guarantees the number that fall into the arms of regulators will surpass what was seen in 2008. Two of the nation's largest savings and loans failed in 2008: Washington Mutual Inc. and IndyMac Bank. Last year's total was more than in the previous five years combined and up from only three failures in 2007. The latest banks seized were American Sterling Bank in Missouri and Great Basin Bank of Nevada. The Federal Deposit Insurance Corp. will continue to insure deposits. Regular deposit accounts are insured up to $250,000. Customers of both banks can still write checks and use ATM or debit cards.

The federal Office of Thrift Supervision took over American Sterling, while the Nevada Financial Institutions Division took control of Great Basin Bank of Nevada. The FDIC was appointed receiver of both banks. The Missouri offices of American Sterling will reopen Saturday. Those in California and Arizona will open Monday. All will open as branches of Metcalf Bank. Depositors of American Sterling will automatically become depositors of Metcalf. American Sterling is based in Sugar Creek, Mo. It had $181 million in assets and $171.9 million in deposits as of March 20. In addition to assuming the deposits of the failed bank, Metcalf Bank, based in Lee's Summit, Mo., agreed to buy about $173.6 million in assets. The FDIC will retain the rest of the assets to sell later. The last FDIC-insured institution to fail in Missouri was Hume Bank, in Hume, in March last year.

For Great Basin Bank, based in Elko, Nev., the FDIC tapped Las Vegas-based Nevada State Bank to assume all deposits. The offices of Great Basin Bank of Nevada will reopen Monday as branches of Nevada State Bank. Depositors of Great Basin Bank of Nevada will automatically become depositors of Nevada State. As of Dec. 31., Great Basin Bank of Nevada had assets of $270.9 million and deposits of $221.4 million. Nevada State Bank agreed to assume all the deposits of the failed bank and purchase about $252.3 million of assets. The FDIC also will keep the bank's remaining assets for future sale. The last FDIC-backed institution to be closed in Nevada was Security Savings Bank, in Henderson, on Feb. 27.

The list of bank failures is growing as falling home prices and rising unemployment cause more individuals and businesses to default on their debt. The failures have sapped billions from the deposit insurance fund. It now stands at its lowest level in nearly a quarter-century, $18.9 billion as of Dec. 31, compared with $52.4 billion at the end of 2007. The FDIC expects that bank failures will cost the insurance fund around $65 billion through 2013. The nation's banks and thrifts lost $32.1 billion in the final quarter of last year, the biggest loss in 25 years of FDIC records. It compared with a $575 million profit in the fourth quarter of 2007.

The FDIC had 252 banks and thrifts on its list of troubled institutions at the end of 2008, up from 171 in the third quarter. Some banks are signaling that conditions are improving. Banking titan Citigroup Inc., which has been the weakest of the large U.S. banks, reported Friday it lost money in the first quarter — but the $966 million loss wasn't as bad as Wall Street had expected. That report followed surprisingly solid earnings from JPMorgan Chase & Co., Goldman Sachs Group Inc. and Wells Fargo & Co. But some analysts say the recent earnings announcements are concealing the depth of the financial industry's woes.

Coral Gables-based BankUnited has 15 days to submit a binding merger or acquisition agreement to regulators.

Coral Gables-based BankUnited, the largest bank headquartered in Florida, could be taken over by federal regulators if it doesn't boost its capital by merging or finding a buyer within 20 days, under an order this week from the Office of Thrift Supervision. The order issued on Tuesday gives BankUnited 15 days to submit a binding merger or acquisition agreement to regulators. BankUnited has been hammered by problem loans made during the housing boom. It said last year it had "substantial doubt" about its ability to survive. The stock of BankUnited's parent's stock on the Nasdaq market closed Thursday at 39 cents, up 9 cents. The bank, founded in 1984, had total assets of $14 billion as of June 30. It has more than 80 offices in Florida, including 16 in Palm Beach County and 23 in Broward County.

Well, I’m glad that’s over. I’m referring to the banking crisis, of course, which apparently ended this week in a wave of big bank earnings that cheered investors. On Wednesday, JP Morgan Chase weighed in with record first-quarter revenue and better-than-expected profit. That news came after Goldman Sachs started the week by reporting a $1.8 billion quarterly profit and Wells Fargo last week released preliminary results indicating it, too, will post record earnings. With some of the biggest corporate welfare recipients in American history generating such strong results, the economy must be on the mend, right?

"You look at these banks' stocks, they’ve been hit so hard it doesn’t take but a little bit of good news to go a long way," said Michael Brell, a senior research analyst with Frost Investment Advisors in San Antonio. Forgotten amid the euphoria are the "stress tests" the government is conducting on all the megabanks, the results of which will be released soon. Those assessments are likely to be more critical that what we’ve seen coming from the banks themselves. In reviewing the numbers, it’s clear the banks haven’t healed themselves so much as returned to their old tricks. The earnings may look good, but it’s not clear that they’re painting an accurate picture of banks’ overall health.

Wells Fargo may have sparked a market rally with its profit promises, but we don’t know how it made the numbers. It has yet to release key details such as delinquency rates and non-performing assets. Then there’s Goldman Sachs, whose profit comes with an asterisk so large that it looms over the firm’s results like an aircraft carrier over a Somali pirate’s dingy. Last fall, Goldman became a bank holding company so it could collect $10 billion in federal bailout money it now says it doesn’t need and wants to repay. The change to its corporate charter, though, triggered an accounting switch from a fiscal to a calendar year. As a result, Goldman’s fiscal fourth quarter ended in November and its calendar year first-quarter, with its $1.8 billion profit, started in January.

And what about December? Well, for that one "orphan" month Goldman booked a $1.3 billion pretax loss. Yet because of the accounting sleight of hand, it’s gone, as if CEO Lloyd Blankfein were an illusionist in a traveling carnival. The great Blanko, of course, has his eye on the real prize — a year-end bonus tied to the company’s financial performance. Removing the billion-dollar loss boosts Goldman’s earnings per share, and if he makes good on his pledge to repay the bailout money and the curbs on executive pay that go with it, Blanko’s looking at a pretty magical Christmas. Even if you take Goldman’s earnings at face value, most of the profit came from its bond trading business, and given the state of capital markets these days, it’s unlikely the stellar results can be maintained.

Meanwhile, Chase’s $2.1 billion in profit also comes with question marks. Like most big banks, Chase is getting a boost from changes in accounting rules that allow them to assign higher values to unmarketable assets on their books. Bankers argue the rule change was essential, because some loans simply don’t have a market value until they’re repaid. That may make sense for, say, a loan on a shopping center, but it’s also possible that some of the derivatives lurking on these banks’ balance sheets will be worthless no matter how long they’re carried on the books. In other words, despite the rosy reports from Wall Street, it’s impossible to know if banks are really as healthy as they say they are. The economy may have slowed its slide, but to borrow Federal Reserve Chairman Ben Bernanke’s analogy, a few green shoots don’t make a forest.

California and North Carolina in March posted their highest jobless rates in at least three decades, as unemployment increased in all but a handful of states during the month, the Labor Department said Friday. California's unemployment rate jumped to 11.2% in March, while North Carolina rose to 10.8%, the highest for both since the U.S. government began a comprehensive tally of state joblessness in 1976. The state-by-state employment figures showed only a few states avoiding the deterioration seen nationwide.

Unemployment rose in 46 states during the month, and 12 states plus the District of Columbia posted unemployment rates in March that were significantly higher than the 8.5% nationwide figure the government released earlier this month. The chief economist for California's finance department, Howard Roth, said the state's unemployment rate hasn't been this high since reaching 11.7% in January 1941. The highest level on record in California is 14.7% in October 1940, he said. California lost 62,100 jobs in March, with Florida next at 51,900 jobs lost, Texas at 47,100 and North Carolina at 41,300, according to the federal figures.

California, the nation's most-populous state, has been hit particularly hard by the housing-market crash. That led to major job losses in the construction and financial industries. "We did it bigger in terms of the housing bubble," Mr. Roth said. "You pay for that by falling farther." Still, the latest figures offered a "glimmer of hope," he said. March losses were about half the 114,000 jobs shed in February, a sign that the pace of decline in California's job market may be slowing. Most economists expect job losses across all U.S. nonfarm employers to continue in April at or near the rapid pace seen in March, when 663,000 jobs disappeared.

California exemplifies the troubles across America. Teresa Nelson, a 54-year-old public-interest lawyer, has sought work at government or nonprofit agencies since last summer. She has applied for 20 jobs and landed five interviews. "I have a lot of qualifications, lots of experience, but people assume I need a higher salary," said Ms. Nelson, who lives in the San Francisco Bay area. "It's been frustrating." The federal report showed 48 states and the District of Columbia posted payroll declines in March. Only Mississippi and North Dakota had slight gains of about 300 jobs. Among states, North Carolina experienced the largest month-over-month percentage drop in payroll employment, about 1%. It was followed closely by Idaho, Minnesota and Washington state, each losing about 0.9%.

Eight states have already seen double-digit unemployment rates, which are calculated on a different survey than payroll numbers. As the economy deteriorates, and job hunters face difficulty finding new work, economists expect joblessness to top 10% nationwide by late 2009 or early 2010. Michigan, battered by turmoil in the auto industry, reported the highest unemployment at 12.6%. Oregon followed at 12.1%, then South Carolina at 11.4%. Only North Dakota and the District of Columbia saw unemployment rates decline for the month. Rates remained flat in Georgia, New York and Rhode Island.

What's the one economic trend we can be certain of, regardless of business cycles? The government is growing as a proportion of GDP. So how do you play it? Well you can invest directly in lobbying for your business, but that's tough unless you're already in a fairly privileged position. Or you can be DC/Virginia real estate, which is pretty much immune from the weaknss in the rest of the country. Or you can invest in GE.

Yesterday's quarterly earnings and conference call made it clear that this is the ultimate big government company. CEO Jeff Immelt referenced the stimulus multiple times in reference to various units: wind, the power grid, rail, health tech, aerospace, defense and on and on. And of course the company has amazing lobbying clout. Any eventual cap-and-trade system is likely to be based on its own framework. When the company recently announced a new medical tech JV with Intel, it had to go out of its way to suggest that it wasn't just a stimulus play. But of course, if the government spends gobs on upgrading health tech (in the name of saving money, of course) GE will be a huge beneficiary.

The fact is that GE has everything the government wants right now. It's blue collar and high tech at the same time. It actually sells real, physical things to the rest of the world -- things made by well paid American workers. And unlike other numerous inchoate green tech plays, it's a real, profitable company. Now granted, there's that little problem of the financial business, which could bring down the rest of the house. But we'd assume that the "No More Lehmans" policy includes GE, too. So they're only going down if other banks collapse, too. And we don't see that happening at this point.

Currency swaps are of reciprocal currency agreements (swap facilities) between central banks. The officially purpose of such agreements are explicitly of short term and are intended to finance short-term capital flows believed to be seasonal or temporary in nature. Swapagreements are also misused to facilitate large interventions in foreign exchange markets, which is what is occurring with the dollar today.

How currency swaps work

The easiest way to understand currency swaps is to think of them as two separate zero-interest loans. For example, let’s say the fed and the ECB arrange a 80 billion euros ($107 billion) swap. The ECB then lends the 80 billion euros to the US, and the US loans $107 billion dollars to the ECB. Later, at an agreed date, the currency swap is reversed: the ECB returns the $107 billion dollars to the fed, and the fed pays back 80 billion euros.

How central banks use currency swaps

Central banks use the foreign currency from swap agreements to prop up their domestic currency by:

A) Providing the foreign currency to domestic financial institutions. (If those institutions were forced to go to the exchange markets for funding, it would drive down the value of the domestic currency.)B) Using the foreign currency to directly intervene in exchange markets.

Why currency swaps are so popular

Currency swaps allow central banks to borrow foreign currencies without revealing that their country's banking system or currency is in trouble. In other words, since both central banks involved in a currency swap borrow foreign currencies at the same time, it is difficult to tell which central bank needed them the most. It is this lack of transparency which makes currency swaps so attractive to central banks.

The dangers of currency swap agreements

Currency swaps are temporary measures that need to be unwound. If the central banks involved in currency swaps were responsible in their use of the foreign credit (ie: financing seasonal short-term capital flows), then unwinding the swap agreement is a simple matter. However, if a central bank uses a currency swap to recklessly intervene in exchange markets (ie: desperately prop up a failing currency), then unwinding swap agreement becomes problematic.

Remember that currency swap agreements are essentially two loans. When a central bank misuses a currency swap to prop up its failing currency, it will not have the foreign currency on hand when it comes time to repay the swap drawings. As a result, that central bank will then be forced to issue bonds in foreign currencies to secure the funds to unwind its half of the swap agreement.

The true danger of currency swap agreements is that they allow irresponsible central banks to temporarily prop up their currencies by racking up large amounts of foreign debt. When the swap agreements are later unwound, not only does the domestic currency’s value fall, but the nation is left with large amounts of foreign denominated debt.

The US has a history of misusing currency swap agreements

Through the treasury’s Exchange Stabilization Fund and the Federal Reserve's System Open Market Account, the United States has twice used swap agreements in failed attempts to prop up the dollar. On both those occasions, the treasury was subsequently forced to issue foreign currency-denominated debt (Roosa bonds and Carter bonds) to repay swap drawings. Evidence of this repeated misuse of currency swaps can be seen on The United States Treasury Department’s website.

(emphasis mine)

Intervention Operations

Treasury policy during 1961-71 period focused on deterring capital outflows from the United States and giving major foreign central banks an incentive to hold dollar reserves rather than demand gold from the U.S. gold stock. The ESF resumed intervention operations in the foreign exchange market in March of 1961 (for the first time since the mid-1930s), but it soon became apparent that the resources of the ESF alone were too small to sustain transactions of the magnitude necessary. At the invitation of the Treasury, the Federal Reserve joined in foreign exchange operations in February 1962.The Federal Reserve entered into a network of swap agreements with other central banks in order to obtain foreign currencies for short-term periods for use in absorbing forward sales of dollars by foreign central banks hedging exchange risk on their dollar holdings. To provide foreign currency to repay the Fed's swap drawings, the Treasury during the 1960s issued non-marketable foreign currency-denominated medium-term securities (Roosa bonds) and sold the proceeds to the Fed.…Later in the 1970s, the US monetary authorities built up foreign currency reserves substantially. For this purpose, the ESF entered in a $1 billion swap agreement with the Bundesbank in January 1978 (which has since been allowed to expire). In connection with the dollar support program announced in November 1978, the Treasury issued foreign currency-denominated securities (Carter bonds) in the Swiss and German capital markets to acquire additional foreign currencies needed for sale in the market through the ESF. The United States also drew its reserve position in the IMF.

April 6 (Bloomberg) -- The Federal Reserve and four other central banks announced a currency swap arrangement that will give the U.S. central bank access to as much as $285 billion in euros, yen, British pounds and Swiss francs.

"Should the need arise, euro, yen, sterling and Swiss francs would be provided to the Federal Reserve via these additional swap arrangements with the relevant central banks," the Fed said in a statement today. "Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets."

The plan, if used, "would enable the provision of foreign currency liquidity" by the Fed to U.S. financial institutions, the U.S. central bank said.

The currency swaps have been authorized through Oct. 30 by the Federal Open Market Committee and are not yet implemented, a sign that central bankers may see no urgent need for the currency lines at the moment. What's more, the Fed hasn't described how it would distribute the currency. One option would be to loan it through the discount window.

"In a regime of greater international cooperation among central banks, it makes sense" for the Fed to have open lines for foreign currency, said Brian Sack, vice president at Macroeconomic Advisers LLC in Washington and a former Fed Board economist. "I don't think it is an irrational response for investors to ask if the central bank is worried about something."

Today's announcement mirrors the dollar swap lines the Fed has established with 14 other central banks, ranging from the Reserve Bank of Australia, the Monetary Authority of Singapore, and the Norges Bank, to provide U.S. currency to foreign markets.…Central bank currency swaps don't carry exchange-rate risk because the reversal, which could be as long as three months later, uses the same rates, the Fed says. All told, the Fed's balance sheet reported $308.8 billion in central bank liquidity swaps April 1.

My reaction: The news that the fed has secured more of currency swaps has some very disturbing implications:

1) There would be no need to secure these new agreements if the fed hadn’t already used most of its existing $308.8 billion in central bank liquidity swaps.

2) This implies that unwinding the Federal Reserves existing swaps would leave the US with close to 300 billion in foreign denominated debt.

3) This development also implies that much of the dollar’s recent rally has been artificially created by the Federal Reserve’s 300 billion currency swap intervention.

4) To date, the fed’s currency swaps have been presented as motivated by shortfalls in USD funding in foreign institutions. While this might have been true initially, it is now obviously false.

Conclusion: The fed’s use of currency swaps to boost the dollar shouldn’t surprise anyone. After all, this is the same fed which has let US Banks operate without reserve requirements, caused the housing bubble with low interest rates, and failed to regulate subprime mortgages. Opening credit lines which could help American banks finance a foreign capital flight falls right into place with the fed’s other actions undermining the US financial system.

Inflation in food commodities will push up gold demand cause manipulation efforts to break down. Already, the NYSE has runs out of 1 kg gold bars, and default on COMEX gold contracts is a month or two away. The collapse of paper gold (futures, unallocated gold, GLD, etc…) would destroy what is left of confidence in the US financial system, starting a panic out of the dollar.

Lesson learned from the financial crisis

The truth of this world is that those, who, through stupidity, greed, and fraud, dig themselves into a hole, will keep digging deeper until they hit bedrock and run out of options. This is what happened with Bernard Madoff: he must have known for years his ponzi scheme was doomed to collapse, but he kept it going until he was down to his last 140 million. The United States, like Bernard Madoff, has for years been digging itself into a hole, and the fed's use of currency swaps to boost the dollar is the final part of this process. Unfortunately, the US, like Madoff, is about to hit bedrock.

U.S. Federal Reserve Chairman Ben Bernanke on Friday defended financial innovation but said the current crisis proves that policymakers must make sure new, complex financial products are transparent enough to enable customers to make reasonable decisions. "Regulation should not prevent innovation, rather it should ensure that innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes," Bernanke said in a speech at a community affairs forum in Washington. "We should be wary of complexity whose principal effect is to make the product or service more difficult to understand by its intended audience."

He specifically warned against placing new limits on credit providers that would prevent the development of new services and products. Bernanke's luncheon speech focused on consumer protections and didn't touch on the economic outlook. The Fed chief said the recent crisis shows that financial innovation "can misfire," noting that products such as subprime mortgage loans, credit default swaps and structured investment vehicles "have become emblematic of our present financial crisis." "The concept of financial innovation, it seems, has fallen on hard times," he said. He noted that in the mortgage market, securitization helped trigger a decline in underwriting standards because it enabled risk to be passed on to investors. Compensation structures also caused problems because some pay structures incentivized originators to offer a broader array of niche products such as interest-only mortgages to a broader group of consumers, he said.

Furthermore, a lot of these problems in the mortgage market were hidden during the housing boom because troubled borrowers could refinance or sell their properties, said Bernanke, adding that many problems weren't apparent until home prices began to fall. "We have learned loan features matter," said Bernanke. He added that the recent credit boom and subsequent bust likely are to have long-lasting effects in terms of lost wealth, lost homes and blemished credit histories. "Indeed, innovation, once held up as the solution, is now more often than not perceived as the problem," he continued. But while financial innovation can be harmful when inappropriately implemented, it has also boosted access to credit and reduced costs and helped communities at all income levels, he said.

Regulators must strike the right balance to protect consumers without eliminating financial innovation, the Fed chief said. Bernanke noted that, as part of the Fed's broad credit card regulations, the central bank has already taken steps to address concerns about a lack of transparency on overdraft fees charged by banks. The Fed expects to issue a final rule on credit card reform "later this year," he noted. Similarly, the Fed has released new mortgage market rules to help address poor underwriting practices, he said. "Many of the poor underwriting practices in the subprime market were also potentially unfair and deceptive to consumers," he said. Bernanke noted that innovation goes wrong when products are so complex that even the most diligent consumers don't understand te terms that affect a plan's cost. "When complexity reaches the point of reducing transparency, it impedes competition and leads consumers to make poor choices," he said. "And, in some cases, complexity simply serves to disguise practices that are unfair and deceptive."

Federal Reserve Chairman Ben S. Bernanke said the collapse of U.S. lending will probably cause "long-lasting" damage to home prices, household wealth and borrowers’ credit scores. "One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be," the Fed chairman said today in a speech at the central bank’s community affairs conference in Washington. "The damage from this turn in the credit cycle -- in terms of lost wealth, lost homes, and blemished credit histories -- is likely to be long-lasting."

The U.S. central bank has cut the benchmark lending rate to as low as zero and taken unprecedented steps to stem the credit crisis through direct support of consumer finance and mortgage lending. The Fed plans to purchase as much as $1.25 trillion in agency mortgage-backed securities this year to support the housing market and is providing financing for securities backed by loans to consumers and small businesses. Bernanke and the Federal Reserve Board approved rules last July to toughen restrictions on mortgages, banning high-cost loans to borrowers with no verified income or assets and curbing penalties for repaying a loan early. The action came after members of Congress and other regulators urged the Fed to use its authority to prevent abusive lending.

"We should not attempt to impose restrictions on credit providers so onerous that they prevent the development of new products and services in the future," Bernanke said. Regulations should ensure "innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes." Bernanke didn’t discuss the outlook for the economy. Central bankers next meet April 28-29. At their March meeting, policy makers said they saw "downside risks as predominating in the near term," according to minutes released April 8. Lenders, including non-bank financial companies, expanded mortgage and other lending this decade to borrowers with blemished or scant credit histories. Subprime mortgage originations rose to $600 billion in 2006, an increase from $160 billion in 2001, according to newsletter Inside Mortgage Finance.

Bernanke said the packaging and sale of mortgages into securities "appears to have been one source of the decline in underwriting standards" because originators have less stake in the risk of a loan. "The Fed is walking in the right direction on a number of issues, and it has opened doors for real action," said Jim Carr, chief operating officer at the National Community Reinvestment Coalition, an association of non-profit organizations dedicated to improving financial services. "But we are still waiting for more aggressive enforcement." Subprime mortgage delinquencies stood at 22 percent in the fourth quarter compared to 5 percent for loans to the highest- rated or "prime" borrowers, according to the Mortgage Bankers Association. "Something went wrong," Bernanke said. "We have come almost full circle with credit availability increasingly restricted for low- and moderate-income borrowers." The recession that began in December 2007 has come at a high cost to American employment and wealth.

Unemployment rose to 8.5 percent in March, the highest since 1983. U.S. home prices fell 8.2 percent in 2008, according to the Federal Housing Finance Agency. Household net worth fell $11.2 trillion in 2008, according to Fed data. U.S. homeownership rates fell to 67.5 percent in the fourth quarter of 2008 from 68.9 percent in the same quarter of 2006, according to U.S. Census Bureau data. Black homeownership rates have fallen to 46.8 percent from 48.2 percent in the same period, and Hispanic homeownership stood at 48.6 versus 49.5 percent. Mortgage delinquencies in the fourth quarter increased to a seasonally adjusted 7.88 percent of all loans, the highest in records going back to 1972, according to the Mortgage Bankers Association. Loans in foreclosure rose to 3.30 percent, also an all-time high.

U.S. venture capital investments fell 61 percent to $3 billion in the first quarter, the lowest level in 12 years, as the financial crisis chased away funding for technology and clean-energy deals. Funding of clean technology -- coming off a surge of investments in 2007 and 2008 -- plunged 87 percent, the National Venture Capital Association said today. Total venture investments dropped 47 percent from the previous three months. The freeze in initial public offerings kept startups from getting funding because investors weren’t sure how they would earn a return, said John Taylor, vice president of research at the Arlington, Virginia-based association. Venture capitalists are devoting more attention to companies they already own.

"We are in a very difficult, stressed time," Taylor said on a conference call. "Everyone is trying to figure out what is going on." Venture capitalists are now wary of the large financial commitments needed to commercialize technologies such as solar power and ethanol, said Noubar Afeyan, chief executive officer of Flagship Ventures in Cambridge, Massachusetts. The investments don’t seem to provide a quick payoff, he said. "A lot of that money came in expecting a short-term exit, which didn’t happen," Afeyan said. The IPO market showed signs of thawing this week, with two companies going public. Bridgepoint Education Inc., a provider of college courses, began trading April 15. Shares of language- software maker Rosetta Stone Inc. debuted on April 16.

Still, the deals probably won’t open the floodgates, said Stephen Harrick, general partner at Institutional Venture Partners, a backer of the Twitter Inc. microblogging site. "We have companies we think are ready or could be ready, but there hasn’t been any interest from the capital markets," Harrick said. The average size of a venture-capital investment fell to $5.5 million from $7.8 million a year ago, the NVCA said. Most of the investments are going to later-stage companies.

President Barack Obama nominated Fannie Mae Chief Executive Herb Allison Friday to oversee the Treasury Department's Troubled Asset Relief Program, putting him at the heart of the administration's drive to bolster the U.S. financial system. Michael Williams, currently Fannie's chief operating officer, is expected to be named to succeed Mr. Allison as CEO, according to people familiar with the situation. If confirmed by the Senate, Mr. Allison will become assistant Treasury secretary for financial stability and counselor to Treasury Secretary Tim Geithner. He also will serve as an adviser on policy matters, the White House said.

In choosing Mr. Allison to head TARP, the administration is turning to an experienced manager at a time when it is having trouble filling key finance posts. Fannie Mae and fellow mortgage company Freddie Mac are vital cogs in the administration's plan to aid struggling homeowners. Both have experienced management turmoil; Freddie Mac is without a permanent CEO. Mr. Allison, 65 years old, has been at the helm of Fannie Mae since the government took over the mortgage titan in September. He is a former TIAA-CREF chairman and Merrill Lynch & Co. executive.

If confirmed, Mr. Allison would succeed Neel Kashkari, who has run TARP since its creation during the George W. Bush administration. Mr. Geithner had been searching for months for someone to run TARP. Mr. Allison's nomination comes as the White House wraps up its bank stress tests, the results of which are expected early next month. The Obama administration also may have to return to lawmakers to seek additional rescue funds, a process in which Mr. Allison would likely play a large role. The White House also said Mr. Obama will nominate William Wilkins to be chief counsel for the Internal Revenue Service and an assistant general counsel at the Treasury. Mr. Wilkins has been a partner in the Tax Practice Group of Wilmer Cutler Pickering Hale & Dorr LLP since 1988.

The inquiry into corruption at the New York State pension fund started simply enough. Alan G. Hevesi, the former comptroller, was accused of using state workers as chauffeurs for his ailing wife. But by the time Mr. Hevesi resigned his office in late 2006, investigators for the Albany County district attorney’s office were examining a more troubling problem: allegations that Mr. Hevesi’s associates had sold access to the state’s $122 billion pension fund, using one of the world’s largest pools of assets to reward friends, pay back political favors and reap millions of dollars in cash rewards for themselves. "We knew this was not going to be a case we could handle ourselves in Albany County," recalled P. David Soares, the Albany County district attorney.

In 2007, Attorney General Andrew M. Cuomo’s office and then the Securities and Exchange Commission took over the inquiry, which has ballooned into a sprawling investigation involving some of the most prominent players in New York’s political and financial worlds. Hundreds of investment firms have been subpoenaed. Three people have been criminally charged and another has pleaded guilty to a felony. And the scandal has grabbed the attention of Wall Street, as members of the investment establishment’s top tier now face scrutiny. The Carlyle Group, the politically connected private equity firm, is among the companies whose transactions are being examined. Steven Rattner, just appointed to serve as the Obama administration’s point man in the bailout of the auto industry, has emerged as a significant figure.

And an investment firm that manages money for the Hunts, the prominent Texas oil family that owns the Kansas City Chiefs football team, has already settled with the S.E.C., and one of its former executives has pleaded guilty to a felony and is cooperating with investigators. In an interview Friday, Robert Khuzami, the S.E.C.’s enforcement director, would not discuss the specifics of the investigation but said it was a top priority of his agency to aggressively pursue "those who violate their trust to safeguard public pension funds." At the heart of the case are the fees paid by investment firms to associates of Mr. Hevesi as the firms sought business from the pension fund. Such fees are legal, unless they are used, either directly or indirectly, to bribe public officials.

The two associates of Mr. Hevesi who have been indicted — Hank Morris, once a nationally prominent political consultant, and David Loglisci, the pension fund’s chief investment officer — are accused of encouraging investment firms to direct money to friends and allies set up as "sham" intermediaries, according to court filings. Mr. Cuomo emphasized this week that more developments were to come. "We do expect additional charges because we have other cases that are being worked up as we speak," he said. "The investigation is continuing." On Friday, a White House spokesman said President Obama had full confidence in Mr. Rattner, a former New York Times reporter and a founder of the Quadrangle Group, a private equity firm.

Mr. Rattner arranged to have Quadrangle pay a company that employed Mr. Morris more than $1 million as it sought business from the pension fund, a person with knowledge of the inquiry said this week. According to S.E.C. filings, the Carlyle Group and another firm paid $10 million to the company that employed Mr. Morris. Both Quadrangle and the Carlyle Group said this week that they were fully cooperating with the investigation. The inquiry has put a spotlight on not only the well-known investment bankers and firms, but more high-profile figures and unconventional business transactions. One top aide to Mr. Hevesi, Jack Chartier, was said to be so infatuated with Peggy Lipton, the former "Mod Squad" actress, that he pressured investment firms to confer benefits on her, including help with her rent.

Another aide, Mr. Loglisci, had investment executives plow hundreds of thousands of dollars into "Chooch," a low-budget movie he and his brother were producing about a lovable loser from Queens; the film also featured Mexican prostitutes and a nine-pound dachshund named Kiwi Limone. Mr. Hevesi’s aides are also accused in court filings of directing more than $800,000 in pension fees to Raymond B. Harding, a former leader of New York State’s Liberal Party, for helping to arrange for an Assembly seat in Queens to be vacated so Mr. Hevesi’s son could run for it. Mr. Morris, once a top national political consultant, has been accused of setting himself up as the pension fund’s gatekeeper for high-flying investments — hedge funds, private equity firms and the like — while Mr. Hevesi was convincing the Legislature that the pension fund should be allowed to put ever greater amounts of money into these loosely regulated investments.

All the while, investment firms were pouring money into Mr. Hevesi’s campaign coffers. "It goes to the heart of public integrity," Mr. Cuomo said this week of the investigations, adding, "The more the scheme goes on, the more brazen, the more confident they become." To be sure, Mr. Cuomo is chipping away at a mountain-size problem afflicting public pension funds across the country. Most of them outsource the work of investing their assets to professional money managers, who compete zealously for the work. The fees paid to the money managers can be very lucrative, even when there are losses, and the fees tend to be higher for riskier strategies like hedge funds.

The problems usually begin when a pension fund’s board is deciding which money managers to award its business to. Many members of these boards are elected officials, like local comptrollers and treasurers, or the appointees of mayors and governors, who also need to raise campaign cash. Money managers have repeatedly tainted the selection process by making campaign contributions to these board members, then walking away with the pension fund’s business. Mr. Cuomo’s office is already considering proposing systemic reforms, at least in the state and possibly federally, most likely in conjunction with the S.E.C. Those reforms could include a ban on the use of intermediaries in pension transactions and stricter limits on campaign contributions made by investment firms, or their executives, to public officials overseeing public pensions.

Certainly, the scandal itself is familiar. In Connecticut, the former state treasurer Paul J. Silvester went to prison in 1999 after pleading guilty to charges of racketeering and money laundering in connection with the state pension fund. In a bid for leniency, Mr. Silvester provided detailed testimony on how he had taken money and favors in exchange for the placement of more than $500 million in state pension money with various investment firms.

Connecticut, like New York, places all pension decision-making authority in the hands of a sole trustee, rather than spreading it among the members of a board. Many governance experts think the use of a sole pension trustee does not build enough checks and balances into the system. But decision-making by boards is not perfect either. California’s big public pension fund, known as Calpers, has suffered so many pay-to-play allegations that in 1997, the State Legislature passed a law barring such payments. But a member of the Calpers board, Kathleen Connell, took the matter to court and won. She argued that the law made it harder for incumbents than their challengers to raise campaign money. The law was thrown out.

Two proxy advisory firms recommended shareholders remove Bank of America Corp. Chief Executive Kenneth Lewis as chairman, turning up the heat on the 62-year-old executive as he tries to weather the current crisis. RiskMetrics Group and Glass Lewis & Co. also joined Proxy Governance, another investor advisor, in asking shareholders to approve a permanent split in the chairman and chief executive roles, a measure up for vote at the bank's April 29 annual meeting in Charlotte, N.C. RiskMetrics, Glass Lewis and Proxy Governance also are calling for lead director Temple Sloan to be removed from the board.

All are citing the company's quick decision to buy Merrill Lynch & Co. and not disclose more about its fourth-quarter losses prior to a Dec. 5 shareholder vote as reason for their recommendations. "While we are generally reluctant to recommend voting against a sitting CEO, we believe there is sufficient evidence of concerns around the acquisition of Merrill Lynch to recommend voting against Chairman Lewis in this case," said Glass Lewis, which is also opposing three former Merrill directors who are up for election.

Risk Metrics said "the entire board will need to be reconstituted in the coming years" and also suggested a vote against non-executive directors Jackie Ward, Frank Bramble, Monica Lozano and Robert Tillman, citing an "absence" of leadership and an unwillingness "to curb Mr. Lewis' penchant for empire building." "Shareholders need to have confidence that directors will act in their best interests. This includes providing independent oversight of management and holding management accountable." Bank spokesman Scott Silvestri said the bank is "disappointed" in the conclusions reached by Glass Lewis and disagrees with the "substance and viewpoint" of the RiskMetrics report. "We believe we have acted legally and appropriately in our disclosures around the Merrill Lynch acquisition and that the acquisition will ultimately create value for Bank of America shareholders," he said.

The global recession is likely to be both deep and protracted, and followed by only a lacklustre and anaemic recovery, the International Monetary Fund said yesterday. The origins of the present slump in a global financial firestorm, coupled with the worldwide nature of the recession, which has swept through industrial, emerging market and developing economies, mean that it is set to be "unusually long and severe, and the recovery sluggish", the IMF said. Most recessions are short, lasting for about a year or so, and are followed by strong rebounds in growth, with most subsequent periods of expansion stretching for up to five years, an IMF study of upturns and down-turns in 21 leading economies found.

But recessions linked to and triggered by financial crises tend to be severe, and recoveries from them are usually slow, the analysis reported. Worse still, it concluded that when recessions linked to financial crises are also spread across many economies at the same time, or "globally synchronised", then they tend "to last even longer and be followed by recoveries that are even weaker". When recessions are synchronised across the world they tend to be nearly one and a half times as long as otherwise, the IMF found.

The fund’s report warned that the present global recession was unique in having at its root a financial crisis in the world’s biggest economy, the United States, but also afflicting most key economies across the world. Recessions associated with financial turmoil tend to last much longer and be more severe as they typically follow periods of rapid expansion in lending and booms in the prices of assets such as shares and houses. When a crash eventually comes, the resulting down-turn is made worse by "negative feed-back", or vicious downward spirals, while recovery is hampered as debt-laden consumers and businesses struggle to rebuild their finances.

Globally synchronised slumps make recovery from recession by individual countries more elusive because the plight of other nations makes it much harder for them to export their way out of trouble, the IMF also noted. The IMF’s sobering message was reinforced last night by Dominique Strauss-Kahn, its managing director. "2009 will almost certainly be an awful year. This is a truly global crisis. Nobody is escaping," he said. However, he added that the "freefall in the global economy may be starting to abate", although this still depended crucially on governments pursuing the right strategies.

A Chapter 11 filing might be the most effective way to overhaul General Motors Corp., but that doesn't mean the sweeping changes that are possible in bankruptcy court are going to be quick or easy. GM CEO Fritz Henderson said Friday that the company still would prefer to restructure out of court as it tries to prove it can survive to repay its $13.4 billion in government loans, but he conceded that bankruptcy protection is more probable than it was in the past. Henderson said in a conference call with reporters that GM is simultaneously restructuring out of court and planning for Chapter 11. The company would either file a prearranged bankruptcy in which stakeholders agree to take cuts, or use a section of the federal code that allows companies to sell off bad assets and keep good ones.

Experts say there are many reasons why the quick, "surgical" bankruptcy that GM may seek won't be as smooth or as fast as the company and U.S. government expect. "It would be a mammoth undertaking," said Jon Groetzinger, a visiting law professor at Case Western Reserve University in Cleveland. "It has been done, not on a scale quite as big as GM." In order for it to go quickly, GM would have to gain agreements from creditors to wipe out debts, unions to change contracts, and perhaps dealers to alter franchise agreements, experts said. There could be thousands of claims from employees, retirees, parts suppliers and others that would have to be heard by the court.

"The only way it would be speedy was if they had all the agreements in advance. But then why would you need it?" asked Doug Bernstein, a lawyer with Plunket Cooney PC in Bloomfield Hills, Mich. It's overly optimistic to think GM can go in and out of bankruptcy for a "quick rinse" of its troubles in as little as two weeks to four months, according to Bernstein. The process, he said, could drag on because creditors could object to contract changes and be heard in court. Experts say six months would be considered quick. Key to emerging quickly would be advance deals with the United Auto Workers union and holders of roughly $28 billion in GM bond debt. Bondholders are being asked to take stock for part of their debt, while the union is negotiating to accept stock for roughly $20 billion in payments GM must make to a trust that will take over retiree health care costs next year.

Henderson said there has been dialogue but no intense talks with a bondholders' committee. Negotiations with the union have taken a back seat to talks at Chrysler LLC, which faces an April 30 deadline to finish restructuring and forge an alliance with Italy's Fiat Group SpA. GM's deadline to give the government completed restructuring plans is June 1. The decision to file for bankruptcy would be made with the Treasury Department's autos task force and GM's board, and the government is not pressuring GM to file, Henderson said. "I felt several weeks ago that it would be more probable that we would need to go through a bankruptcy process," he said. "That continues today. But I wouldn't be able to hazard a guess as to what the probabilities would be."

Henderson mentioned Section 363 of the bankruptcy code, in which companies under court supervision auction off bad assets while keeping good ones. "The first thing a company will do when they go into bankruptcy is figure out what their bum assets are," Groetzinger said. "It's a way of shedding the nonproductive or less-productive assets." But such auctions need time for the company to line up bidders, and creditors may object to the terms, he said. GM's good assets also could be auctioned, he said. Even if GM gets deals outside of bankruptcy to exchange debt for equity, slash benefits, or close showrooms, not every bondholder, retiree or dealer will agree, said Steve Mertz, a partner with the Faegre & Benson law firm in Minneapolis.

"At the end of the end of the day you're going to have to use the bankruptcy process to implement whatever agreements they negotiated outside of bankruptcy," he said. Regardless of how GM is restructured, the automaker will need more government aid in the second quarter, Henderson said, although further loans haven't been approved. The company said in February that it would need $4.6 billion in the quarter, and that hasn't changed, he said. Meanwhile, GM is finding ways to make deeper cuts than its Feb. 17 viability plan outlined. Henderson emphasized that more factories will be shuttered beyond the five closures GM announced in February. The factories have not been identified.

More employees will lose their jobs this year than the 47,000 the company had planned to lay off two months ago. GM is also working to slash its portfolio of eight brands. Henderson expects final bids from three potential Hummer buyers by next week, with a decision expected by the end of April. He said several parties are interested in GM's troubled Saab unit. GM revealed this week that a number of groups have proposed to take over Saturn. More than six parties are interested in buying a stake in GM's Opel unit in Germany, and Henderson said he expects work to be done in the next two to three weeks.

But despite reports that GM is under pressure to get even smaller, Henderson emphasized that the company's plan calls for the automaker to keep four core brands — Chevrolet, Cadillac, GMC and Buick. He said GMC and Buick are highly profitable. Henderson also said the company will not sell its ACDelco parts division, despite having potential buyers. "It's a highly profitable business for us. It's creating good, strong cash flow," Henderson said. "Our conclusion was that we weren't going to get the value for the business." Henderson also said the company's April sales were "OK," but he did not elaborate. GM shares fell 8 cents, or 4.1 percent, to $1.86 Friday.

Rick Williamson, a Chicago banker turned junk-loan buyer, knew the name-calling would start again when he moved to foreclose on the Fayetteville Athletic Club, a sprawling, family-run gym and spa complex in this corner of northwest Arkansas. "Vulture, bottom feeder," Mr. Williamson said, recalling insults thrown his way during his years hunting for bargains in distressed real estate. And just as he predicted, the insults are flying. "Trash-eating rat," is how Robert Shoulders, the club’s owner for the last 13 years, described Mr. Williamson. "What he does is reprehensible. I am not sure how he can sleep at night." Mr. Williamson sees it differently. And the government agrees.

As he points out, it isn’t his fault that Mr. Shoulders overextended himself by borrowing $10 million to add the spa, a preschool and tennis courts to his once-modest health club. And by moving aggressively to collect on loans like these, Mr. Williamson says, he is playing a crucial role in helping clean up the bad debts that are clogging the economy. "If you want to fix what is ailing this country, you need to destroy the worthless debt out there," he said, adding with characteristic candor, "You have to shut down the zombies, liquidate their assets." Clashes like this are increasingly taking place across the country, as banks struggle through their worst crisis in a generation. And Mr. Williamson is part of a niche industry that buys at bargain-basement prices the hard-to-collect commercial loans that the Federal Deposit Insurance Corporation auctions off after it seizes a failed bank. They take on the most troubled assets, the ones others aren’t willing to touch, in exchange for potentially lucrative returns.

Nationwide, the F.D.I.C. has seized 56 banks over the last 15 months and through loan auctions has sold about $2.1 billion worth of loans. The $1.2 billion generated for the government has gone into the fund to insure deposits at other banks. Many of the auctioned loans are considered "performing," meaning the borrowers are current on their payments. But a portion of them are delinquent, like the one held by the Mr. Shoulders and his wife, who stopped making payments after their local bank, ANB Financial of Bentonville, Ark., failed last year. Loath to throw homeowners out on the street, the F.D.I.C. has made it a national policy to try to avoid foreclosures on the single-family mortgages it inherits from failed banks, even if payments are past due. But there are no such rules to protect struggling small businesses, whose loans are more typically sold at the F.D.I.C. auctions.

The borrowers, like the Shoulderses, suddenly find themselves dealing with aggressive out-of-state loan consolidators, rather than local banks with long-standing community ties. And the consolidators’ primary objective is to immediately collect on the debt, or seize the collateral. The single biggest buyer at these auctions so far has been Andrew Beal, a banking billionaire from Texas who made his fortune buying distressed debt during the savings and loan crisis. By the end of February, Mr. Beal had paid more than $200 million to buy $438 million worth of loans nationally, according to agency records. Some of the loans came from the failed Arkansas bank. Mr. Beal is hardly averse to risk. He is famous for trying (and failing) to build his own space satellite launch company, and for luring some of the world’s best poker players to a series of games, with him as a participant, and betting pots worth $2 million. Mr. Beal, in a telephone interview, said he went to great lengths not to push people out of their businesses, but at times he had no choice.

"Borrowers force us into litigation," he said. "They don’t want to perform on their loan, they won’t talk to our workout people. What are we supposed to do, send them a vase of roses?" Another buyer here, Daniel C. Cadle of Newton Falls, Ohio, has drawn some of the loudest protests over the years for hardball collection practices. In 2007, Massachusetts authorities accused him of not having "the character, reputation, integrity and general fitness to engage in the business of a debt collector in an honest, fair and sound manner." They cited instances like when a representative of his firm told a debtor that he had photographs of the man outside his house, knew his wife’s name and had information on his bank account.

For nearly a decade, Mr. Cadle faced the threat of arrest by authorities in Texas, based on a debt collection dispute that turned particularly nasty. Mr. Cadle says his run-ins with the law are a consequence of his willingness to demand repayment from some powerful people. And he makes no apologies for working hard to collect from debtors. For nearly a decade, Mr. Cadle faced the threat of arrest by authorities in Texas as the result of a lengthy debt collection dispute in which a county court concluded that Mr. Cadle had tried to financially ruin a debtor and used a pattern of abusive lawsuits. Mr. Cadle says his run-ins with the law are a consequence of his willingness to demand repayment from some powerful people. And he makes no apologies for working hard to collect from debtors. "We are heartless because people refuse to pay us even payments they can afford?" he said. "You aren’t taking advantage of anyone if you are simply asking them to pay what they owe you."

Some of the debts are so hard to collect that the F.D.I.C. lets these loans go for a song. LeMire Schmeglar, a mortgage broker in Chicago, bought 191 delinquent loans with a book value of $6 million. He paid just over $15,000. F.D.I.C. officials, in a written statement to The New York Times, said the agency had tried to balance its mandate to recoup as much as possible through the sale of loans it acquired while still protecting the interests of borrowers. "We are statutorily required to sell assets in a way that will get as much money back for the uninsured depositors and other creditors, including our insurance fund," Andrew Gray, an F.D.I.C. spokesman, said in the statement. "By focusing on a small percentage of particularly distressed assets, the view becomes distorted." Mr. Gray added that the agency was creating a new unit to field any complaints from customers who had loans at failed banks.

There is a fair amount of mystery about the F.D.I.C.’s auction process. Bidding is not open to the public. And the list of winners is next to impossible to decipher. It is filled with enigmatic names like "Brown Bark III" and "Oceanside, CA 92054," entities that have no Web sites or telephone listings. Matthew Anderson, a partner at Foresight Analytics, a California firm that has studied the F.D.I.C. sales, said the buyers of these loans typically hoped to earn a profit of 25 to 35 percent a year — a high rate of return, but achievable only by buying loans with big risks. The forceful collection efforts are spreading nationally as bank failures increase. A search of court records shows cases filed by buyers of F.D.I.C. business loans in states like Florida, Arizona and Michigan.

In Arizona, Michael W. Bauer, 53, an electrician and owner of a vending machine business, said that after 15 years in business, and never once defaulting on a loan, he might have to file for bankruptcy because an entity called SMS Financial XVII, which bought his loans from the F.D.I.C. after the failure of First National Bank of Nevada, had filed a foreclosure lawsuit against him. "I owe the money. I know that, and I am prepared to repay my loan over time," he said. "But to be strong-armed like this, at the moment when you are the most vulnerable, it just does not seem right." Northwest Arkansas, home to Wal-Mart and the poultry giant Tyson Foods, is hardly the epicenter of the banking crisis. But because ANB Financial was one of the first reasonably large banks to go bust, just as the wave of mortgage defaults was getting under way, the distressed loan drama is playing out here with particular intensity.

Even before the F.D.I.C.- sponsored auctions took place last fall, some of the agency’s Arkansas staff tried to warn small-business owners in the Fayetteville area to try to quickly clear up any past-due debts or be prepared to face the consequences, according to company owners and a former agency contractor. "They said it out loud and quite clearly," said Marsha G. Dunbar, who worked as a contractor for the F.D.I.C. after it took over ANB, where she once was a loan officer. "Settle up these debts now, or it is not going to be pleasant," Ms. Dunbar said, paraphrasing the warnings. Mr. Shoulders and his wife, Katherine, who bought the Fayetteville Athletic Club 13 years ago, heard these same warnings. They offered to pay $6 million immediately, and an additional $1 million upon the future sale of the gym, if the agency would agree to forgive their $10 million in debt. F.D.I.C. officials, seeking to maximize their return for the insurance fund, said they proposed to reduce the loans’ interest rates instead, an offer Mr. Shoulders disputes was ever made. So the loans were bundled with others and auctioned off in late October. That was where Mr. Williamson came in.

More than a year ago, at the first signs of recession, Mr. Williamson, a one-time Illinois soybean farmer who became a banker in the 1980s, quit his corporate bank job to form his own business specializing in buying up distressed debt. Like many in this business, Mr. Williamson, 57, is not shy about confrontation. He is openly disdainful of what he calls "the nanny state," referring to a federal government that he says too often tries to protect delinquent borrowers. He bought the Shoulderses’ loans for 34 cents on the dollar, an outcome that left the gym owners furious, because the auction produced a price that was far lower than they had offered to pay the F.D.I.C. From the start, relations between the two sides were tense.

"These guys put a gun to our head and said 100 percent is due in 10 days," said Mr. Shoulders, 54, a tall, wiry man who uses a giant green exercise ball as his desk chair and wears a big name tag on his gym fleece that simply says "Bob." Within a matter of weeks, a foreclosure lawsuit was filed, as the Shoulderses, citing credit markets that had grown even tighter, said they could raise only $5 million to repay their loans. After evaluating how much the collateral — the lavish club — was worth, Mr. Williamson rejected the offer. The lawsuit is pending in the local court system. Business is still brisk at the Fayetteville Athletic Club. Its workout rooms are filled with local doctors, lawyers, Wal-Mart executives, even the local tax assessor. But the Shoulderses, who are prominent figures in the community here, soon may no longer own the club.

"Were we overextended? Yeah, I will not deny it," Mr. Shoulders said, as he walked through the gym, greeting members by name. "But we have put our heart and soul, and every penny we have earned, into building this place. It is criminal the way we have been treated." As Mr. Williamson sees it, a debt is a debt. "When I grew up, people paid for their mistakes," he said.

The party’s overIt’s time to call it a day. They’ve burst your pretty balloon. And taken the moon away...-Nat King Cole

The Netherlands is a small country with a relatively large and wealthy population of 16-plus million inhabitants. The number of inhabitants per square mile is among the highest in the world, and the population increased from 14 million in 1980 to 16.5 million in 2008.

The scarcity of single-family dwellings and condos for this growing population of families and single-person households provided steadily increasing demand and steadily rising housing prices until the mid-1990s. From 1995 on, however, the prices of houses began to increase at a much faster pace, caused by the accelerated growth rate of the population, the growing number of single-person households and the declining interest rates. The second graph shows that an average house purchased for $100,000 in 1995 would have had a value of $278,000 in 2008, due to the growing housing demand and the capacious availability of cheap money.

Interest Development Since 1979

Although the accelerated price development over the last 13 years can be explained, it should be a source of increasing concern, due to a number of reasons:

(Inter)national banks and mortgage suppliers like the Bank of Scotland, GMAC, ING, Rabobank and Aegon allowed people to borrow up to 5-6 times their annual income on a mortgage against very competitive prices, as the interest rate was very low and risk seemed to be virtually non-existent. Some maverick banks even lent up to 9 times the annual income.

Many people used the opportunity of the "peak mortgage" - a special form of mortgage where a person borrows 120% of the execution value of the house to cover for transfer costs and taxes. The fact that buyers of houses started "underwater" didn’t bother most of them, as long as housing prices kept rising and interest rates stayed low.

The housing prices got extra leverage due to the income tax deductibility of the interest on mortgages in the Netherlands. This rebate delivers a total national tax break of $15 billion - approximately 8.3% of the national tax income of $180 billion.

Besides causing extra leverage on housing prices, the tax break makes it very attractive --especially in times of cheap credit -- to maintain the full mortgage amount for the whole duration of the mortgage (mostly 30 years), instead of paying off the home loan: the redemption-free mortgage. A simplified example: A person who earns 100,000 EUR per year, owns a mortgage of 450,000 EUR on his home, that bears 4.5% of interest. There are segregated tax rates of 30%, 40% and 50% of the taxable income.

click to enlarge

In this case, the holder of the mortgage pays only 2.25% of interest on his mortgage for the whole fixed interest period. And during the whole maturing time of the mortgage, half of the interest paid can be deducted from income taxes. In the meantime, or at the end of the 30 years, the mortgage sum could (in theory) be repaid by:

a special savings/investment account in combination with a life-insurance policy connected to the mortgage;

taking a new (higher) mortgage on the house, while repaying the old mortgage;

selling the house (for a higher price) to repay the mortgage.

As there's currently no boundary for the amount of interest that can be deducted from income taxes, people with high incomes tend to take an as-high-as-possible mortgage on their houses, instead of financing it with their own money. Their own money can be put in equity, bonds or even on a savings account, making easily 4% of yield. And of course, it could be spent on consumer goods.

Housing prices increased so much over the last 15 years that young couples (so-called "starters") almost couldn’t afford to buy a simple house, even on 2 incomes.

The capacious availability of cheap money, in combination with the rising prices of housing in the Netherlands, caused many people to find their fortune just over the border in the neighboring countries Belgium (Flanders region) and Germany. The result of this was that the prices of housing in these regions were also rising rapidly and in correlation with the Dutch prices.

Of course, the whole development of housing prices wouldn't be a big issue when these 5 basic conditions remain intact:

1. Interest should remain low;

2. Housing prices should keep rising;

3. The value of equity, used as a collateral on specialized "investment mortgages," should remain high and keep rising;

4. Banks should remain generous about lending money;

5. Unemployment should remain low.

But these conditions didn't remain constant. It started with the interest rates creeping up as of 2005 - causing bellyaches for people that were due for a rate change, and causing the time-upon-sale for expensive houses to increase dramatically. And suddenly, the perfect storm hit the Netherlands - like always, 1 year after it struck the US. Large, international trading banks and insurance companies like ING, Aegon, Fortis and ABN Amro proved to be overloaded with CDOs and other risky derivatives. They wrote off loads of assets until they were on the brink of destruction, caused by negative equity.

The stock prices of these banks plummeted due to the lack of confidence of investors. After this, the stock prices of virtually every stock available plummeted, annihilating the value built up in pension funds, life insurances and "investment mortgages." In trying to save the day, banks drastically cut their lending capacity by:

saying no to mortgages above 3.5 times the annual income for limited-risk borrowers;

saying no to medium and high-risk borrowers;

increasing the risk fee on adjustable rate mortgages.

Although the effect was curbed by the ECB lowering interest rates dramatically and the Dutch finance minister urging the banks to hand over the interest breaks to the customer, the result was a dramatic decrease in mortgage sales from September 2008 off. Currently the dropping exports -- the Netherlands are a country with a huge trade surplus -- cause rapidly increasing job losses in agricultural companies and other internationally oriented companies, like Corus (steel), DSM and AkzoNobel (Chemical products), DAF Trucks, Nedcar (Automotive), AirFrance/KLM and Philips (Light, Medical and Consumer Electronics).

These mounting job losses lead to a drop in demand, causing a domino effect that starts to strike the housing market. Over the last quarter of 2008, prices for housing dropped an average 2.5%, while the first quarter of 2009 even showed a price drop of 3.1% and a drop in sales of 40%. NVM, the largest guild of real estate brokers in the Netherlands, expects the bottom to be in, proclaiming that now is "a perfect time to buy a house, as the prices did go down considerably." I consider this wishful thinking: The shrinking of the Dutch economy has only just begun, and might go on at least until 2011. If you listen to people like Professors Depew and Shedlock -- which I do -- it might go on for a number of years to come. The signs are there:

mounting unemployment (3 % rise in March alone)

mounting arrears of payment in the Netherlands; per November 2008 already 27% of households suffered some kind of payment arrears. This figure (from the Dutch Department of Social Affairs and Employment) doesn't include mortgages;

stock prices that remain on a low level, slashing the value of life-insurance policies, built-up pensions and people’s life savings (on average, the Dutch citizen lost $30,000 in value over the last year);

bankruptcies increasing rapidly in every line of business;

consumer purchases at historically low levels, as even the supermarkets complain of the frugality of their customers.

If the price of housing should go down to the level of the year 2000, there might be a 30% haircut underway, increasing the problems of people that were already soaked in mortgage debt when their house was still worth its purchase price. All others see the value of their main investment diminish. Final question: Is this a bad development? No, because this is an indispensable development for a Dutch housing market that became unaffordable for almost everybody:

The 30%-50% of hot air that's present in this inflated housing bubble might disappear, making housing more affordable for everybody and getting the prices more in synch with our neighboring countries.

The housing market that was almost completely closed for starters, is slowly starting to open again with affordable prices looming on the horizon.

All kinds of housing price-related taxes will now decrease.

It can be a perfect time to get rid of the ridiculously expensive and unfair tax deductibility of interest paid on mortgages; housing prices are already falling, so the effect might vanish in the bigger picture. The money that's saved then can be spent to give everybody an equal tax break.

The downside of this is, of course, the mounting risk for banks, insurance companies and pension funds that invested heavily in Dutch mortgages. So if you have Dutch stocks like ING or Aegon in your portfolio, you better keep your eyes peeled in the coming months.

Royal Bank of Canada’s $850 million writedown on its U.S. assets may be a sign of things to come for other Canadian lenders with U.S. operations, investors said. The country’s largest bank said late yesterday it will record the cost for the second quarter ending April 30, reflecting plunging real estate values and recession in the U.S. The writedown is equal to the bank’s net income of about $859 million for the fiscal first quarter. Toronto-Dominion Bank and Bank of Montreal, which also have U.S. consumer-banking operations, could find their earnings reduced as well this quarter, said Todd Johnson, who helps manage about C$100 million ($83 million) in assets at BCV Asset Management in Winnipeg, Manitoba.

"It could be a bellwether," Johnson said. "Let’s face it, housing prices are still falling aggressively; loan losses are still up there. It’s going to shape up to be an interesting earnings season for banks coming up." The Toronto-based lender was expected to earn C$1.44 billion for the second quarter, according to the average estimate of two analysts surveyed by Bloomberg News. The bank is scheduled to report results on May 29. Toronto-Dominion Chief Executive Officer Edmund Clark said April 2 that earnings this year may be flat from 2008, as it sets aside more money for bad loans in the U.S. Canada’s second- biggest bank has about as many branches south of the Canadian border as it does in Canada.

Royal Bank and other Canadian lenders have taken about C$19.6 billion in pretax charges related to debt investments since the third quarter of 2007. That’s a fraction of the $923 billion in writedowns recorded by banks and brokers worldwide in the biggest financial crisis since the Great Depression. Royal Bank’s writedowns and credit losses have been C$4.52 billion, including C$1.38 billion last quarter. Canadian banks have already braced investors for further writedowns, said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc. in Toronto. "They’ve set the bar fairly low," said Nakamoto, whose firm manages about C$3 billion, including Royal Bank shares. "It’s all premised on us being in the ending innings of the credit crisis for now."

Royal Bank, which owns the Raleigh, North Carolina-based RBC Bank, said yesterday the charge was a result of testing the goodwill at its international banking unit. It won’t affect the bank’s capital ratios or its ability to pay dividends, spokeswoman Jackie Braden said. "It’s a non-factor in terms of anything that matters to the bank’s valuations right now, in terms of cash earnings or regulatory capital," said John Aiken, an analyst at Dundee Securities Corp. in Toronto. "It’s already been priced in." The writedown will reduce net income by 74 cents a share and "almost wipes out" reported earnings, said Aiken, who has a "sell" rating on the stock.

The international banking unit, which includes its U.S. operations, had a C$144 million loss in the fiscal first quarter because of higher provisions for credit losses. Bank of Montreal, the country’s fourth-biggest bank, is "comfortable" with the valuation of goodwill based on an annual review completed in October, spokesman Paul Deegan said in an e-mailed statement. The Toronto-based bank hasn’t seen "significant changes" since then in its U.S. personal and commercial banking business, which is based in Chicago. Royal Bank rose 80 cents, or 1.9 percent, to C$43.15 in 4:10 p.m. trading on the Toronto Stock Exchange. The stock has risen 20 percent this year.

Europe’s exports to its main trading partners dropped by the most in at least nine years in January as the global economic slump sapped orders for products from cars to chemicals Exports to the U.S., the world’s biggest economy and the second-largest market for euro-area goods, after the U.K., plunged 27 percent from the year-earlier month, the European Union’s statistics office in Luxembourg said today. Exports to the U.K. fell 29 percent, while those to China, Europe’s third- biggest trading partner, declined 26 percent. The drops are the steepest since the euro-area data series began in 2000.

European companies are cutting output and jobs as the worst global recession in more than six decades curbs demand for the region’s goods. China, the world’s third-largest economy, said yesterday that its first-quarter economic growth was the slowest in almost a decade. The Organization for Economic Cooperation and Development forecasts the global economy may shrink 4.3 percent this year. "The European economy is suffering from a global slump in export demand," said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. "The situation will remain difficult over the coming months."

The port of Antwerp, Europe’s second-busiest, after Rotterdam, said yesterday that freight volume fell 19 percent in the first quarter from a year earlier and forecast a decline of 15 percent for the full year. The OECD projects the euro-area economy may contract 4.1 percent in 2009. Total exports from the 16 nations using the euro increased a seasonally adjusted 0.5 percent in February, today’s report showed. The trade deficit narrowed to 4 billion euros ($5.2 billion) in February from 5.4 billion euros in January as imports dropped 0.8 percent. The detailed country data are published with a one-month lag.

Unemployment across the continent rose more than expected to near a three-year high in February and manufacturing contracted in March for a 10th straight month. The European Central Bank has already signaled it has room to lower its key interest rate further from the current record-low 1.25 percent. Amsterdam-based Royal Philips Electronics NV, Europe’s biggest maker of consumer electronics, this week reported a second straight quarterly loss amid a "significant further deterioration" of its markets. Groupe Danone SA, the world’s largest yogurt maker, said yesterday that first-quarter revenue declined 2.3 percent as yogurt sales dropped for the first time since at least 1996.

Adding to signs of a deepening European slump, construction output dropped 11.8 percent in February from a year earlier, the 12th straight decline, the statistics office said in a separate report. From the prior month, construction fell 1.8 percent. Germany’s Hochtief AG, which built the new Yankee Stadium in New York, said last month that profit will be flat this year as sales and orders decline. Essen-based Hochtief, the nation’s largest builder, gets 15 percent of sales from outside Germany. "There are now many indications the euro-zone economy in the first quarter did worse than in the fourth quarter," said Carsten Brzeski, an economist at ING Groep NV in Brussels. "New orders from abroad are still declining, although the pace is slowing."

The ECB is under pressure to outline more unconventional tools to revive economic growth after cutting its main refinancing rate by 3 percentage points since early October. The bank’s 22-member Governing Council is split over the best way to boost the economy, with Axel Weber and Jose Manuel Gonzalez- Paramo signaling this week that they are against reducing borrowing costs below 1 percent. ECB President Jean-Claude Trichet said in Tokyo today that the central bank would do everything possible to restore confidence and revive economic growth, pushing the euro to a one-month low against the dollar. The single currency remained lower after the trade and construction data, trading at $1.3086 at 10:55 a.m. in London, down 0.8 percent on the day.

Jean-Claude Trichet, European Central Bank president, has played down the prospect of big changes in strategy in the bank’s efforts to combat the eurozone recession, but denied its governing council is split over the issue. ECB actions needed be implemented "first and foremost" through the banking system, Mr Trichet argued in a speech in Tokyo. It was "important not to create or encourage expectations," he added. Earlier this month, the ECB president announced that the bank’s 22-strong governing council would unveil a package of additional "non-standard" measures after its meeting on May 7. That raised expectations that the ECB would follow the Bank of England and US Federal Reserve in circumventing the banking system to buy outright private or public debt.

Mr Trichet’s comments did not rule out such measures but were the in line with remarks earlier this week by Axel Weber, Germany’s Bundesbank president, who was also wary about direct intervention in financial markets. However, amid an apparently lively semi-public debate, other council members, such as Lucas Papademos, vice-president, and Ewald Nowotny, Austria’s central bank governor, have argued that buying corporate debt could help boost the eurozone economy. Mr Trichet dismissed talk of splits, saying in Tokyo: "We have a very united governing council." As well as stressing the greater importance of the banking system in providing finance to the eurozone economy than in the US, Mr Trichet also highlighted the need for an "exit strategy" once the crisis was over. That could reflect worries about difficulties in the future selling assets acquired as a result of "credit" or "quantitative easing". Mr Trichet argued that, "confidence today relies equally upon the audacity of our immediate decision and upon the soundness and credibility of our exit strategies."

So far, the most likely measure to be announced on May 7 is an extension of the maximum period over which the ECB will supply unlimited amounts of liquidity to eurozone banks from the current six months. Such "enhanced credit support" – which has led to some eurozone market interest rates falling below comparable rates in the US – has formed the cornerstone of the ECB’s strategy since the collapse of Lehman Brothers investment bank last year. But analysts warned that the ECB risked a damaging backlash if other steps were not included in the May 7 package. Markets would conclude either that the ECB saw no need for extra measures – or was unable to agree on how to proceed, argued Marco Annunziata, chief economist at Unicredit. "Either interpretation would heighten fears that European policymakers are not equal to the task, and that the eurozone is headed for a very long recession." He added: "This is exactly what Trichet warned against in Tokyo - indecisive policymakers undermining investor confidence."

Bad loans made by Spanish lenders rose in February, as the deepening recession spurred defaults by companies and consumers. The bad-loan ratio was 4.18 percent of total credit, compared with 3.87 percent in January and 1.13 percent a year earlier, the country’s central bank said on its Web site today. Loans in arrears leapt to 77.7 billion euros ($102 billion) from 20.1 billion euros. The slumping Spanish economy, which BNP Paribas SA says may shrink 3.5 percent this year, is driving bad loans to the highest levels in 12 years.

Spain mounted its first bank rescue in 16 years last month when the state seized Caja Castilla La Mancha and pledged up to 9 billion euros in guarantees for savings bank. Spanish savings banks had a loan-arrears ratio of 4.45 percent, up from 1.03 percent a year earlier. The arrears ratio for commercial banks was 3.17 percent from 0.86 percent. The bad-loan ratio for savings banks was 4.84 percent in February, up from 1.15 percent a year earlier. At commercial banks, it reached 3.45 percent from 0.92 percent. Alfredo Saenz, chief executive officer of Banco Santande

The economic situation of Austria and its banks’ exposure in eastern Europe is of "no particular" concern, according to International Monetary Fund Managing Director Dominique Strauss-Kahn. "The Austrian situation is fairly good, so I have no particular concern about the Austrian economy these days," Strauss-Kahn said in comments on Austrian public radio today. Officials including Finance Minister Josef Proell and central bank Governor Ewald Nowotny this week said comments from Nobel Laureate Paul Krugman paint a wrong picture of the nation’s economic situation. Krugman said the situation in Austria looks "pretty scary" as the country has the most at risk in Eastern Europe and may need a bank bail-out. "If it becomes more difficult in eastern Europe then all the countries -- not only Austria but Italy, Belgium, France, Germany -- would have some problems," Strauss-Kahn said. "That’s why eastern Europe is so important, but it’s not typically a problem which will be bigger for Austria than for others."

Italian automaker Fiat SpA may form an alliance with General Motors Corp's core operations in Europe and Latin America, Automotive News said on Friday, citing an unnamed source. The deal would be on top of Fiat's plan to merge with U.S. automaker Chrysler LLC, the weekly trade magazine said. The talks with GM are in an early phase and were not an alternative to Fiat's ongoing negotiations with Chrysler, the magazine said, citing the same source. The deal would not include Saab's and Chevrolet's European operations, the magazine said. Fiat had no immediate comment and a GM spokeswoman was not immediately available. GM, which is operating under emergency funds from U.S. taxpayers, is trying to sell its European Opel and Saab brands.

GM Chief Executive Fritz Henderson said on Friday that it has contacted at least six parties regarding Opel. "We've reached out to well more than six, actually, people who have expressed an interest (in Opel). These are serious people," Henderson told a conference call with reporters. "Many of them are financial players, some of them are industrial players. I would expect that work would get done in the next two to three weeks and so that process has kicked off," he said. Henderson was less specific regarding Saab saying only, "We have a number of parties who are interested in looking at Saab and our books are open, if you will, in terms of what that business looks like and I don't really have anything more to report there."

Thousands of workers marched in the Chilean capital on Thursday to demand job security and more state protection amid a rash of layoffs linked to the global economic crisis, with a small core of protesters clashing with police. Police cordoned off the presidential palace downtown and stopped traffic along Santiago's main thoroughfare as protesters marched with banners reading: "The workers will not pay the price for the crisis" and "Worker dignity." The march was organized by Chile's largest labor union umbrella group, known by its Spanish initials CUT, and the protesters included a broad spectrum of workers from teachers to supermarket staff.

Some protesters pulled down metal barricades and lobbed them at police, who responded with water cannons and teargas, during a short-lived clash in central Santiago, but Reuters witnesses said marches in the capital were otherwise peaceful. The government said police arrested 148 people mostly in Santiago, 53 of them minors. Local media put the turnout in Santiago at 12,000 people. Like many of its emerging market peers, Chile's economy, long regarded as one of the most stable in Latin America, is facing a sharp slowdown as the global crisis hammers demand for its top export, copper, and depresses domestic consumer buying.

"Big businesses are firing workers," CUT President Arturo Martinez told fellow marchers in downtown Santiago. "(Protests) will go on and on until the abuse stops." Martinez also called for a state pension fund instead of private pension funds, while protesters used the strike to demand improvements to the country's education system. The marchers sought to pressure the center-left government as it heads into a presidential election later this year that opinion polls indicate a resurgent right will win. "We think this has been a relatively orderly demonstration. Workers have been able to voice their demands," said Patricio Rosende, undersecretary at Chile's Interior Ministry.

"We're sorry that as always there are isolated groups who try to disrupt the legitimate right of workers to speak out," he added. Protest leaders condemned the violence. CUT led a four-day strike in November in which hundreds of thousands of Chilean public-sector workers participated to demand a pay increase, forcing President Michelle Bachelet's government to improve its pay raise offer. "We are fed up with abuses by businessman who are sheltering behind the crisis and making huge layoffs," said Lilian Gallardo, 40, a union leader who represents staff at department store chain Almacenes Paris. Chile's jobless rate for the December-to-February period rose to 8.5 percent from 8 percent in the November-to-January period as the global crisis took its toll.

State-run copper giant Codelco told Reuters its output had not been affected by Thursday's protests. Chile's top private copper mines were also unaffected, Chile's National Mining Federation union said. To combat the economic downturn, the government unveiled a $4 billion fiscal stimulus plan in January and introduced measures to spur credit, while the central bank slashed its target lending rate. But Chile's economy shrank 3.9 percent in February, the biggest decline since May 1999 and the fourth consecutive monthly drop, putting it on the path to recession. Analysts now forecast Chile's economy will contract 0.5 percent in 2009, a far cry from the 2-3 percent growth the government had been forecasting.

Oleg Deripaska, once the richest Russian oligarch, has lost his place among the country's top 10 billionaires, after $25bn (£17bn) of his empire evaporated during the financial crisis. Only one in three Russian tycoons classed as billionaires last year remains in that exclusive club, according to Forbes Russia, which compiles an annual rich list. The magazine has calculated that Russia's top 100 wealthiest citizens have seen their fortunes depreciate by 73pc – or $380bn – as a result of falling markets and asset prices.

Top of this year's list was mining tycoon Mikhail Prokhorov, who sold 25pc of Russia's biggest mining company to Mr Deripaska before the financial crisis hit last year. His $9.5bn fortune made him $1bn richer than second-placed Roman Abramovich, owner of Chelsea FC. "The crisis has affected everyone: financiers and developers, metallurgists and oil men, consumer goods producers and sellers and the owners of diversified holdings," Forbes said. This is the first recession to threaten Russia for the last decade, in which a super-rich class of billionaires have made their fortunes in the asset-rich country. The rouble has lost a third of its value against the dollar since the stock markets peaked in May last year.

Australian Treasurer Wayne Swan said economic growth and revenue forecasts in the May 12 budget will be "substantially worse" than outlined in February because of the global recession and a slowdown in China. Swan said the budget would be affected by "deep downturns" in Australia’s major trading partners, such as China, as demand slows for exports from the world’s biggest producer of coal, iron ore and wool. "The global recession and deep downturns from our major trading partners make it certain that out own forecasts for growth and revenue in the budget will be substantially worse than in UEFO," Swan said, referring to the updated economic and fiscal outlook released last month.

Economic growth in China, Australia’s biggest trading partner, was the slowest in a decade in the first quarter. It added to evidence Australia’s economy will slide into its first recession since 1991 amid the global slump. The government on Feb. 3 said the economy would have contracted in 2009-10 without its A$42 billion ($30 billion) stimulus package of grants and infrastructure spending. The economy will grow 0.75 percent in 2009-10 with the package, which also sent the budget into deficit for the first time in eight years, it said.

Social Security is a major problem; Medicare is a crisis. You add both of those... shortfalls together and you're getting something that's ... between $80 and $120 trillion in total present value shortfalls

For taxpayers in America, today is the deadline to pay their federal income taxes for 2008. With that chore behind them, they might now like to think about their future taxes -- the ones that will pay for the $787 billion stimulus package, the $2 trillion commitment to prop up collapsing financial firms, and other programs that promise to deepen our $11 trillion national debt. Of course, that doesn't count the $80 trillion to $100 trillion shortfall in funding for Medicare and Social Security. According to Wharton insurance and risk management professor Kent Smetters, a former deputy assistant Treasury secretary and economist for the Congressional Budget Office, most Americans should not be worrying about having to pay higher taxes. Why? Because even the biggest tax hikes will not raise enough money to pay off the debt and meet coming obligations. Accomplishing the latter would require politicians to do something they fear even more than raising taxes: Cut back on Medicare and Social Security benefits. Smetters described the coming crisis in an interview with Knowledge@Wharton.

An edited transcript of the interview follows:

Knowledge@Wharton: Assuming China continues to invest in our Treasury bonds, when do we have to start backfilling the deep debt hole that we've dug for ourselves, not even counting the much bigger shortfall for Medicare and Social Security that's heading our way?

Kent Smetters: [China is] very nervous right now and... they've thought about floating an international reserve that's no longer U.S. based. But even given the assumption that under the Safe Haven hypothesis [that United States Treasury bonds are the safest investments], U.S. debt is still viewed as the safe place [for investors] to go. And we continue to get the ability to float debt at these very low rates, which is almost a topic unto itself because these rates are so unbelievably low. But we face a very... significant short-term problem... because all this [U.S. government] debt is going to crowd out lots of private investment, and [the stimulus package it is funding] assumes that the government can do a better job at picking... the winners and [losers with its] investments.

Economists don't have a hard and fast rule that says, "Here's your maximum debt ceiling. And here is the most that you can go." But given where we are in terms of paper debt -- we're adding another $2.1 trillion just this coming fiscal year and we're going to be close to $11 trillion to $12 trillion in total, and on top of that ... Social Security and Medicare -- we really do face a very dire situation right now. The U.S. economy has never faced this type of challenge in the past, even in World War II when our paper debt was high. We just never faced the type of fiscal challenges that we face right now.

Knowledge@Wharton: Do we have to dig ourselves out of the national debt before we can address Social Security or Medicare?

Smetters: No. In fact, ideally, it would be in some ways just the opposite. Social Security and Medicare are much bigger problems, and the longer that we delay those, the more those problems [will] snowball. In particular, every year that we delay reform on either of those programs it adds about another $2 trillion to the present value shortfalls of both programs. So just a one-year cost of delay is about the size of the record deficit that we're going to have this year....

Knowledge@Wharton: So, whatever we do for Social Security, the bottom line is that it has to cost a lot less than it does now.

Smetters: Yes. You can certainly raise some tax revenue in some places. People have talked about increasing the maximum taxable wage cap [currently $106,800].... That's not going to... help a lot in present value, because those people will eventually collect more benefits. They're not going to collect as much... as they paid into the system, but it's still not going to be super-effective.... People have [also] talked about taxing fringe benefits like health care and so forth. But the fact of the matter is that these benefits are growing faster than inflation. We have to bring Social Security benefit growth rate closer to [the rate of] inflation for it to be a sustainable system. And that's the easy problem. Medicare is the tough one.

Knowledge@Wharton: Medicare is tougher, why? Because ... people [are reluctant] to give up benefits that have to do with their health care?

Smetters: Medicare is tough for two reasons. One, the shortfall in Medicare is six to seven times larger than in Social Security. Social Security is a major problem; Medicare is a crisis. You add both of those... shortfalls together and you're getting something that's ... between $80 and $120 trillion in total present value shortfalls. ... People can't even imagine how big that number is. If you took the total value of the United States, except for the people (all the land, houses, buildings, everything that's non-perishable, your washer and dryer, cars, and so forth), it has about a value of about $50 trillion. So we're talking about a shortfall of twice the value of the value of the U.S. except for the people. Now, the value of the people is about three times that. We're just talking about biblically large shortfalls. We've never seen this type of problem.

Eighty percent of that is driven by Medicare. And a lot of that is because of the way Medicare benefits are provided. It's not a dollar benefit, it's an "in kind" benefit. That is, they pay for operations. And so how do you scale that back? A dollar benefit like Social Security is easier to scale back. An operation, what do you do there? Do you say, "Okay, we'll pay for half of it and you pay for the other half of it?" People have talked about this, but it's more likely that we'll move to some type of rationing system unless we take kind of a long [term] approach and get people to save for their future medical costs.

Knowledge@Wharton: The Obama administration asserts that reforming health care overall for all Americans the best way to address Medicare. Do you agree?

Smetters: It will address some of it. It is interesting that the Obama team is starting to lean more toward the [Hillary] Clinton proposal, [raised] during the [Democratic primary] campaign, for... mandatory coverage. There's nothing I've seen so far, however, that will fundamentally address the core issue, and that is that medical care costs are simply going up. Increasing access is great for various social reasons, but it's not going to have a big impact on increasing costs unless we actually start making some hard choices. Some of those hard choices are going to be very unpopular, especially when you start to ration care. You basically say, "You've hit a certain age [after which] we're no longer going to do those triple bypasses," or something like that. And that's obviously a tough choice. I hope we don't get to that.

But the second approach is more of a long term approach, where you have to make people sensitive to how much... they spend on health care. That's the core problem: People always want the very best, even if the marginal benefit is much less than the marginal costs, because they don't bear the cost. In Medicare, the government bears the cost. And so people don't have any type of trade off between spending and benefits. They always want the very best. And... the innovators always come up with the better pill even though its efficacy may be just marginally better than the generic drug; or the better operation, even though its efficacy will be just marginally better than the cheaper operation.

Knowledge@Wharton: Is there a way to bring more sensitivity about marginal benefits and marginal costs?

Smetters: There are only really two things you can do. The first is you say, "Well, people still aren't sensitized to cost and benefits. We'll keep on paying for it." And in that case the government then has to say, "You know what, we'll keep on paying but for only some stuff." And now the government is the one in charge of deciding who gets what. The second approach is to actually make people directly sensitized to it. And you do that with things like health savings accounts in which people have to pre-fund some of their future medical care. They have to pay out the first several dollars of that care, and the government's only a back stop on a catastrophic case.

The problem with the health savings accounts, people say, is there's an equity issue -- some people can't accumulate a large savings account. And so then how do you address that issue? Whatever you do to address that issue de-links people from being sensitized to benefits and cost. So there's no silver bullet here. Ultimately, the best package is some type of hybrid where you have people being sensitized to health care costs for routine care. For catastrophic care you probably have a government back stop, but more of minimal back stop than we now have. It's not always wise to pay for the best device that's out there. It's really about taking into account cost benefits.

Medicare, by the way, will claim that it take costs and benefits into account. But in effect they do not. They will approve almost anything that has some type of marginal benefit and not really think very hard about the costs.

Knowledge@Wharton: How does the government go about preparing people for this? Given the psychology that you just discussed, how does the government go about preparing people for those difficult choices?

Smetters: That's an interesting question because elected officials really have no incentive to do that. The chance of them being around 20 to 30 years or even 10 years from now is pretty low. So they have an incentive to always keep things going along. History has shown that it takes a crisis before you get any type of reform. And obviously that [last minute] reform is never the best possible reform. So, we could talk about what things the government will do. But we know the government won't.

It's going to require a lot more action by citizen groups. The Peter G. Peterson Foundation, for example, tries to educate people about some of these fiscal problems. Certainly there are some "blue dog" Democrats and some Republicans who want to talk about this issue. But for the most part this is an issue that [causes] you to lose re-election. So, trying to have a sustainable, reasonable conversation is difficult. And it's only becoming more difficult as the baby boomers start to age even more and they become even more sensitive to this issue.

Knowledge@Wharton: So then what does the result of the crisis -- when the crisis arrives, what does it look like in terms of taxes? If we have to raise them to some extent, along with cutting back benefits, what does the tax bill look like for Americans?

Smetters: We currently have a present value shortfall that's twice the value of the entire country, except for the human beings. So, obviously, we can't tax our way out. So the real issue is, what type of hit are we going to give do to benefits? You're going to see benefits reduced, especially for higher income earners. We got a hint of that in Medicare Part D, the newest part of Medicare that gave us our prescription drug bill. They explicitly have some means testing in there, which basically says higher income people get a smaller benefit. Social Security benefits are now taxed. And in fact, they've been taxed since 1983. But it's taxed on a progressive basis. Higher income workers get more of their benefits taxed. I think you'll start to see a lot of more of that.

And so what will happen is Medicare and Social Security will become more of a flat system, [with] fewer benefits to higher income people even though they paid in more. But on the [revenue] side, I don't see a lot of room for continuously increasing taxes. We'll see, I think, more taxes on higher income individuals. And that will have long run implications because they're also the ones who create jobs and invest and innovate. We already have the second highest corporate income tax rate in the world, even after you net in things like expensing and so forth. So for us to remain competitive, I just don't see how... we can really do a lot on the tax side. But I do think we will see taxes go up. The thing I fear the most -- and I think it is the most likely outcome -- is that the government will print a lot of debt to pay off a lot of these shortfalls. And then the international markets, in particular the fixed income markets, will figure it out.

They will realize the government is basically monetizing that debt through higher inflation. And if you have an inflation rate that's 25, 3% more per year than the historic average, you can really eat away a lot of debt just through the law of compounding. And so the market should figure that out and adjust the interest rates accordingly. That's one reason why I believe that 30 year yields right now on Treasury [bonds], especially to non inflation protected Treasuries, is really too low. I believe Treasuries are in a bubble right now because everybody's flocked to the safety. And there's just no way that those low yields of 3.5% are going to cover the inflation rate over the next 30 years.

Knowledge@Wharton: Why doesn't the rate respond to the reality of what's going on in the market?

Smetters: In theory it should. I think what you have is a flight to safety going on right now, where people are basically saying, "Where else do I hold my money? And I'm nervous about the markets." It's obvious that people are worried about even corporate fixed income, given the very high yield that those are earning right now. So people are panicked. And so they're moving toward was viewed as historically safe, and that's U.S. Treasuries. The irony is that a whole herd of people moving into one security because they're scared creates a problem for those people because prices of those securities get bid up. You're going to have a lot of people holding long duration, fixed income, government securities who are going to see pretty significant price declines over the next decade.

Knowledge@Wharton: And it's not just China that is holding those bonds. It's also American retirees or future retirees.

Smetters: Sure.

Knowledge@Wharton: What is it that's keeping the Chinese government in that market?

Smetters: China, Japan and the UK have over half of our debt.... Traditionally the view was that U.S. debt is safe and there were some regulations, especially for Japanese pension funds, requiring investments in safe areas, and U.S. Treasuries qualified because of their safe reputation. China is starting to question that now, as are other investors. The question becomes, when does it kind of snap? What we know from fixed income markets and foreign exchange markets internationally is that things don't just gradually change. Investor sentiment suddenly snaps and people start to panic. We saw that in Asia and Latin. One reason U.S. may face a different situation is that, in the case of previous crises such as in , South Korea or Thailand or Argentina, it was easy just to yank your money and put it elsewhere. When you yank your money from the U.S., you are not 100% clear about where you put it. And so that may create more of a gradual scenario for the U.S..

But, you know, we're seeing growth in the BRIC countries [Brazil, Russia, India and China]. It would not be surprising that you could see -- not an Asian style currency crisis or anything of that magnitude -- but certainly our own currency crisis in which investors would suddenly get nervous and start to pull out of U.S. Treasuries. We could see yields increase quite a bit, and rates and prices decline.

Knowledge@Wharton: Would it mean an absence of cash for the government to do what it does?

Smetters: It would mean that they would have to pay much higher interest rates to float the same debt. That just makes it more difficult for them to continue to roll over the debt. One reason why the Treasury can get away with holding so much debt is that at current yields, it's pretty cheap for them. Japan during the 1990's was facing yields of close to 0%. It's shocking that they, in some sense, weren't floating even more debt than they were. And they were floating quite a bit.

But the real lesson is not so much the cost of debt, because what Japan did during the 1990's showed us is that the Japanese government was able to float debt for dirt cheap. The real problem is that they diverted a lot of investments away from new, nimble financial institutions [and propped] up the very inefficient, old school finance institutions. We're basically doing the same thing in the United States. We're trying to prop up institutions that were too large to begin with, AIG and lots of the investment banks. They were just too big to begin with. That's why corporate risk management was never possible, because... they were just too big, too unwieldy to think about corporate risk management very seriously.

Somewhat ironically, [the major banks] actually lost more money buying some of the safer [subprime-based] collateralized debt obligations, than they did with their investments in hedge funds, which bought some of the higher risk stuff... These old institutions, these investment banks and large insurers like AIG, they're just old, inefficient and too large. And we're trying to prop them up. We're trying to keep them alive. And that's exactly what Japan did and that's why Japan had a recession that lasted a good decade. I see that scenario playing out over the next five years in the United States. Unless we're willing to allow for a good train wreck, to have some pain in the short run, we're going to have this train wreck screech out over many, many years. And, as a result, we won't clear the tracks very quickly.

I've said it before and I'll say it again: The one nice thing about a good train wreck is you clear the tracks quickly and you start over -- but we just refuse to let that happen. That's what Japan did.

Knowledge@Wharton: Would clearing the tracks quickly mean allowing some pain to occur sooner rather than later?

Smetters: Yes. There are a couple of dimensions. One is what's going on in the subprime market and the banking market. There, clearing the tracks quickly basically means creating the most transparent fiscal institution possible. And [procedure for doing] that is called bankruptcy. Everybody says we want to clean up the balance sheets of these institutions y quickly, and we want to do it in a cheap and efficient way. Well there's a process already out there, it's called bankruptcy. That's exact what it does. It cleans it up very quickly. And in terms of the entitlement programs [Medicare and Social Security], there's no real equivalency of bankruptcy per se, rather we need to have this long discussion about exactly how we're going to scale back benefits -- because we can't raise taxes enough.

Social Security is the easier problem. Again, it's a cash benefit and all you need to do is slow the benefit growth to something closer to inflation toward, closer toward inflation. And that in particular means hitting higher income people a little bit harder in terms of their eventual benefits. I wouldn't tax them a lot more, but I would certainly decrease their benefits. Do that and you can pretty much fix Social Security.

Medicare is much harder, obviously because it's a much bigger problem and because of the nature of its benefits. So again, there your choices are, either have people pay for a lot of it themselves and therefore be sensitized to this tradeoff between benefits and costs, or the government takes a much more draconian approach and basically says, "We'll still pay for it, but now we're just going to start rationing who we pay for and what we pay."

78 comments:

The Last Summary
said...

* The dollar will be toast someday; Don't buy a house yet; Buy SDS in a few months; Get some gold and sliver if you can afford it; Plant a garden; Learn some skills; Make some friends* Peak oil is on the back burner; Someday it will return to the front burner and then life will change; Nothing produced using oil is sustainable long term; For most of us everything we see every day is there because of oil, hence nothing we see everyday is sustainable, not one thing, from your morning coffee to wake you up to your Lunesta to help you sleep and all the clothes and meals and furniture and roads and cars and buildings and trees and bushes in between* Unfortunately the internet is not sustainable; TAE is here for one brief shining moment; Visit the tip jar often* The banks and their toadies in the government will continue screwing us as long as they can which will be way too long * Obama may mean well but we don't know and it probably doesn't matter; We do know that most of his appointments and policies are despicable though a very few seem OK* The US as we know it is a goner to be replaced by something we won't much like; Europe probably also; Many parts of South America and Africa are a wreck, largely thanks to the US and Europe; China is in trouble but will overcome but not without lots of pain* All men are selfish bastards at heart (ladies, pardon my French); The selfish bastards with power and money are the most efficient selfish bastards; Some few have overcome this tendency but not many* Stoneleigh is always right; A thousand thanks for her wisdom and calm* Those disagreeing with Ilargi are always wrong; A thousand thanks for his insight and energy* El Gallinazo is a nice guy but hides it* Snuffy is everyman's hero* Greenpa is, well, Greenpa* Starcade is paranoid; He is also probably right though his timing is off* Gravity is a theory* Prepare as best you can and hope your preparations can save you and yours; They might for a while if you are lucky* The poor and the meek will inherit the earth because they don't expect so much and will share* Take what joy you can while the world lasts; Love your friends and family as best you are able* A fond goodbye to anonymous redheads everywhere* Alas poor Blinky, I knew him well

This point of the following comment is not directed at anyone in particular.

Great teaching is a laudable skill. You have all these (real) Nobel laureates at Harvard in chemistry and physics who could not teach an undergraduate how to open a can of tuna. "New stuff" is not the only criterion for heaping praise. Great teaching is also praiseworthy. Beside, one can make a good argument that nothing new has really happened since the first time Adam got laid.

Lendman never made the most important point that we want all the stinking money back from the bankers and2) "No one asks:

* what if states and cities can’t provide vital services; * hospitals have to close down “due to disruptions in insurance payments;” * “supermarket shelves are emptied because trucking companies can’t get short-term loans to stay in business;” * utilities “are crippled as the crisis kills the revenues they count on from corporations;” and * “soaring deficits drive interest rates sky-high and gut the dollar, driving the cost of living through the roof.”"TheAutomaticEarth did and

3)It took these filth 70+ years to break down the financial controls and regulations in order to once again rob and defraud hundreds of millions of people. Reregulating won't help, it has been shown to be only a temporary fix. Taking the money back and slapping these people down will have a greater effect and the sooner the better.

In the cover story in the latest issue of Toronto Life, Katrina Onstad writes about the boundless enthusiasm the younger generation is showing in the face of an economic meltdown.

Her over-educated, under-employed interview subjects are so relentlessly positive about the future that Onstad at one point blurts, "What if it's not okay? What if it's breadlines for everyone? What if it's Grapes of Wrath?" To which her 25-year-old subject responds with a puzzled, "I just don't go there. I just don't think that way."

“I have over the years expressed disdain with the “free market ideologues” for their steadfast refusal to even contemplate the possibility that “Capitalism” could possess vulnerabilities of need of recognition and corrective action. Yet, economic history is replete with boom and bust cycles, along with a bevy of post-Bubble writings providing us fertile ground for cogent analysis of system vulnerabilities. Contemporaneous analysis during the Great Depression focused clearly on the acutely susceptible U.S. Credit system that emerged from “Roaring Twenties” lending and speculative excesses. During the forties, fifties and even into the early-sixties there was some adroit analysis of the Credit system’s role in the boom and subsequent depression. This entire fruitful line of analysis was, however, stopped dead in its tracks with the emergence of a revisionist view of the twenties as the “Golden Age of Capitalism” needlessly terminated by post-crash policy blunders. ”Capitalism's Greatest VulnerabilityDoug Noland, Credit Bubble Bulletin z

God! I know. It's not just the young either. The majority of an aging holistic clique (of which I am a dishonorary affiliate member) thinks that anything less than a 110% positive, "Yes we can" attitude is, quite literally," a moral sin. To lust, gluttony, greed, sloth, wrath, envy, and pride, we can now add realism. I wish we had John Lennon back to make a new hit, "Give Realism a chance!"

We will miss your humor and clever words. Thanks for all of the entertainment you've provided here. And now, I give up on saving the world. We are all connected, you know. Wishing you lots of rainwater to collect this coming season!

I would also add that the onset of spring has come just in time to buoy people's misguided hopes. Here in the NE US the weather is sunny, low humidity, and quite pleasant. Yesterday and today have been nearly perfect afternoons for lazing about and forgetting the ongoing global financial collapse and concurrent destruction of the middle class.

I believe it must have something to do with all the books on positive thinking that have sprung up over the years - You can do it, The Secret, the richest man in babylon, Tony Robbins and other optimism preachers, Oprah and Dr Phil, Rich Dad, Poor Dad, Who moved my cheese?, Brian Tracy and books of that ilk.

I admit to having read quite a bit of optimism and you can be all that you can be literature. They have all sorts of cool sounding names like Neuro Linguistic Programming and they use lots of psycho babble. But once I got to learn about peak oil, the financial crisis, environmental degradation, how the money system works. I quickly realized that people in the feel good and optimism industry are out to make a quick buck on feel good and that they have no consideration of long term consequences and biophysical limits.

What might be a great idea today? (HEY! Let me stick a motor on wheels) turns out to be a horrible idea a century later. Optimism is entrenched in today's generation, none of my friends can really see how ugly things are going to get. It's funny. You tell them the end of the world as we know it is coming and they tell you which financial services paper they are going to sit next... Arrrgghh!!!

Hey, it's not paranoia if you know that either they are out to get you, will be out to get you, or damn well (if what they want to take place is to take place) SHOULD be out to get you. I'm sorry to hear you're leaving us, Summary.

The hinges are coming off, and only either a mass elimination or a mass incarceration is going to reset the board enough to keep life livable for the remaining masses.

many people suggest that china and asia will come out the far side of this mess being the pre-eminent empire.

can someone explain why?

given their population density and the limits to growth we are now bumping up against, i t would seem that they face much more severe conditions at some point in the future, simplyform the stance that its a lot hader to feed and provide health care for a few billion as opposed to a few hundred million.

I'm always astonished at how even college-educated Americans don't know about world history and philosophy. Their ignorance abets their denial of today's crises and lets them swallow any pseudo-knowledge that comes their way.

The problem as I see it is that people, esp. in America want easy solutions that require no sacrifice on our part.

I work in a library and have looked at "The Secret". Talk about drivel!!!!!!!!! My 6-year-old daughter can write better than that rubbish!! I have seen a lot of garbage that passes for writing, but that book says nothing in roughly 200 pages.

The Secret really is a secret because there is nothing to be said or written.

Just look at KJack Canfield and all his Chicken S(l)op, er, I mean Soup books. This guy has milked millions on the back of his crap! And then he gets to add to The Secret by telling people that he was down and out , but discovered it.

Oh yeah! All he discovered was how to tap into the human psyche regarding feel-good, warm and fuzzy stories. Heck, do we even if these stories he writes about are true?

What a crock!!!!!!!!!!!!!!

Trust me, I am not pissed because I didn't think of this crapola. It isn't even the money making that bothers me.

Plain and simple....It teaches the wrong messages and it dumbs down society. Trust me, I have my guilty pleassures, like college football. But at least I know I will never play that game. Too old. But people read the get rich quick, how to succeed crap and it dumbs them down.

Rather than invent somthing people actually need and is energy efficient, not costly, and green, we get a bunch of losers that are no more than middle men selling cell phones or women getting 6% on every home they move.

UGHHHHHHHHHHHHHHHHHHHHHH!!!

Combine that with what Dan W. writes about and you have a recipe for GD II, which may be the last one if things go as bad as I think.

Oh people will still be left, just not enough for GD III, at least for several centuries, if we even last that long!!

VK - "What might be a great idea today? (HEY! Let me stick a motor on wheels) turns out to be a horrible idea a century later."

Ghandi was the first I read to see this - in the 30's! (regarding the gasoline engine, etc. as a power multiplier)

Thoreau seemed also to have a sense of the correctness of things natural and simpler, as did Quaker John woolman who, for example, always wore unbleached, undyed clothing because slaves were used to mine the dyes.

But few of these deeper minds achieve the kind of relevance that Ghandi did.

El G & VKMy friends and family are extremely optimistic about the future. They are not willing to listen to even a slight amount of pessimism... to the point where they even put a positive spin on all the bad news. My guess is that they believe that if TSHTF they will somehow be spared any hardship. The cheerleading from the MSM is music to their ears. With all of this ubiquitous denial, I wonder how people will cope when reality is forced upon them.

The Terminal Optimism that is running mad throughout the Fatherland, accuse me Homeland, was distilled into a quote by an un-named aid to Bush the Least (KKKarl Rove).

This mindset even has a Wiki page!

http://en.wikipedia.org/wiki/Reality-based_community

"The source of the term is a quotation in an October 17, 2004, New York Times Magazine article by writer Ron Suskind, quoting an unnamed aide to George W. Bush (Rove):

The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors…and you, all of you, will be left to just study what we do."

"..And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors…and you, all of you, will be left to just study what we do."

What's up with all the quitters tonight? And at least Summary could have left us hanging--like the good tease he is--and not informed us of his departure. We all could have held out hope for just one more flash of blogging brilliance, and there would still be a Daugher of the Mother Earth redhead in the groupie gallery.

Did anyone read through the comment section on that Globe and Mail article? I knew there was a reason I didn't often stray from places like TAE and the Oil Drum. Anyway, I don't recommend reading the thread, as the amount of Teh Stupid is astounding. Hope springs eternal...

was listening to Tool the other day and realized that the lyrics to "vicarious" are disturbingly descriptive of modern society. welcome to gomorrah

Eye on the TV'cause tragedy thrills meWhatever flavor it happens to be

Like:"Killed by the husband" ..."Drowned by the ocean" ..."Shot by his own son" ..."She used a poison in his tea,Then (she) kissed him goodbye"That's my kind of storyIt's no fun til someone dies.

Don't look me at like I am a monsterFrown out your one face, but with the other (you)Stare like a junkie into the TVStare like a zombie while the mother holds her child,Watches him die,Hands to the sky cryin "why, oh why?"

Cause I need to watch things die from a distanceVicariously, I live while the whole world diesYou all need it too - don't lie.

Why can't we just admit it?Why can't we just admit it?We won't give pause until the blood is flowin'Neither the brave nor boldNor brightest of stories toldWe won't give pause until the blood is flowin'

I need to watch things die from a good safe distanceVicariously, I live while the whole world diesYou all feel the same so why can't we just admit it?

Blood like rain fallin' downDrum on grave and ground

Part vampire, part warrior,Carnivore and voyeurStare at the transmittal.Sing to the death rattle.

La, la, la, la, la, la, la-lie (x4)

Credulous at bestYour desire to believe inAngels in the hearts of men.But pull your head on out (of) your hippie hazeAnd give a listenShouldn't have to say it all again

The universe is hostileSo impersonalDevour to surviveSo it is, so it's always been ...

That's an Interesting quote from the "unnamed aide to George W. Bush", to wit:

that guys like him were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors…and you, all of you, will be left to just study what we do."

He deserves a more detailed description than mere 'Aide'. 'Accomplice' comes to mind, as does 'arrogant knucklehead', but 'Idiot' (used in the original sense of the word, from the Greek 'idios' ...cognizant only of self.) is probably the best.

As "history's actors" they appear most prominently late in the play of Empire, typically the tragic denouement of Act III , and despite inflated opinions of self importance, are really just carrion eaters who fancy themselves to be great carnivores.

What makes their braggadocio so annoying is that they crow loudest when being their most stupid (like wreaking the Empire they think they are leading.)

Such deluded zeroes create nothing (unless one considers 'wreckage' or 'smoking ruins in place of a civilization' to be creative acts.)

Ultimately, they are not even the root cause of the destruction! They are more like opportunistic disease bacteria who are easily and routinely killed within a healthy organism, and can take control only when the immune system is compromised by advanced age or earlier injury.

"Such deluded zeroes create nothing (unless one considers 'wreckage' or 'smoking ruins in place of a civilization' to be creative acts.)"

It may be a creative act when the dust settles, comparable to the thug-in-chief blowing up his penthouse through shear stupidity.

I have listened to Mike Hudson's last Guns & Butter interview ( April 15 ) twice now, and one of things that I have become fascinated with is how the American Dollar reserve status has become they key to the empire. Hudson states that if any country should start to refuse our paper (or electronic digits) as currency, then the USA will consider this an act of war and use its 200 odd bases around the world to attack it. Equivalent to your local thug walking into a convenience store with a pocket full of Monopoly money and a .357 prominently displayed in a shoulder holster and buying his groceries. As Louis Armstrong would sing, "What a wonderful world."

I did some philosophical work on the value of despair a year or so ago, and got a fair bit of static from positive thought quarters so I started looking into it more. I'd always associated it with New Age, but it actually goes back at least to the New Thought Movement of the 19th century (largely in America). I was also struck by how much of the positive thought stuff had crossed over into fairly mainstream forms of Christianity. Billy Graham's 1955 - The Secret of Happiness is full of it. Prosperity Theologians included a lot of this positivity stuff too. Even mainstream psychologists were part of the picture. I thought that the idea that a well-functioning psyche needed to be capable of both positive and negative emotional states would be uncontroversial, but I've had regular psychologists think that that was already too pessimistic of a picture. Also, gullibility is not limited to America, but this particular brand of gullibility - over-positivism, and can-do-spirit beyond reason, has been associated with America, both here and abroad since the beginning of the 20th century, and the the New Thought movement certainly begin in, and had its roots in America, even though it also grew to international scales.

How the US would attack Russia, China, South America etc simultaneously if they were to leave the dollar based system is a mystery to me? Already the US military is over stretched, and a land based attack across Asia and Russia is the stuff of LSD laced dreams.

The only option they would have is an all out nuclear strike, and ummm, last I recall Russia still has 1000's of these lying all over the place. Ready to go from Vladivostok right up Washington's ass. (From Siberia with love?). This would be a pretty crazy move and a final act of desperation as the market for US goods and for imports would be destroyed. How an attack of such scale would be justified is another issue and surely the pay off would be limited if non-existent at this point.

Though I can certainly see nuclear war as a possibility, Jay Hanson wisely posits that such an eventuality may occur in 15-20 years as the resource base begins its rapid depletion into blinky land.

This thought also occurred to me, but it would not be applicable to non-nuclear and third world countries that could not retaliate with nukes. Furthermore, as Iraq proved in its "shock and awe" phase, a conventional cruise missile attack with no invasion follow-up can be quite devastating and something to be avoided. Obviously attacking Russia would be suicidal and probably China as well. This makes it interesting, as the issue will probably come to a head first with China. It is probably no coincidence that it is Russia and China who have the temerity to bring up the question of the US dollar as the world's reserve currency.

Re the positive-think dialog

I believe that the issue goes to a really deep theological level though multitudes of self-help scam artists are a major factor. Most of us have, to some degree, lots of maladaptive behavioral patterns that lead to self-destructive behavior and useless depression. These can occasionally be unwound and reversed through some types of proper cognitive therapy. Also, the ability to persevere over a lifetime in a righteous cause, in which the odds are certainly stacked against you, can be something extremely laudable. The American civil rights movement of the 1950's for example.

The Krishna idea, which in highly simplified form could be described as just doing your best and let the chips fall where they may, has much to recommend it.

I have met in my life a few highly developed souls who can maintain an almost constant cheerful positive attitude while simultaneously being in closer understanding of real negative forces than I am. I think that this may be what a life time ( or several :-) of Bhuddist meditation might aim at.

None of the above negates the uselessness of denial style positivism. (I use the term "positivism" in its colloquial sense and not the school of philosophy, for which I also hold no fondness.) For example, I have a good friend, totally ensconced in the holistic movement and in her late 50's, who is, to a large extent, financially dependent on dividends from an inherited stock portfolio. She absolutely refuses to heed advice from either me or "J." Now, if she had really reached one of these advanced Bhuddist states of equanimity, this would be fine. However, she was over visiting the other month and a relay in her SUV went bad and she couldn't start her car. She went totally apeshit with frustration. This is a case where holistic, positivist denial may lead to an unenviable outcome.

Positive thinking is just another pretext and rationalization which cultivates the human proclivity for greed and plunder. Stepping on, and using the back of your brother as an upward mobility ladder is not a sin after all; it is the metaphorical equivalent of extracting lemonade from lemons. Furthermore, that unlucky, trampled lout needs a few more self-help seminars himself. And if that pesky conscious starts whispering guilty thoughts in my ear, I can point to my Bible and alleviate any potential moral trepidations with a "prosperity gospel." pill. Come Monday morning, and I'll be ready to go again. I'll hop into my giant SUV, cut across the double yellow into the Starbucks' drive-thru, and start laying some profanity laced horn on the bumpers of all those losers in their economy cars that are slowing my journey to the promised land.

Though I can certainly see nuclear war as a possibility, Jay Hanson wisely posits that such an eventuality may occur in 15-20 years as the resource base begins its rapid depletion into blinky land.Jay Hanson is a waste of space, nuclear war could have happened 40 years ago during the cold war and why 15 to 20 years from now? Resource depletion could happen for the USA as soon as it can no longer pay it's oil imports. BTW, bomb sand dunes, I don't think so.

Hey man, you really want to show your age like that ... we are both for the worms soon enough, so click those heels together, boot black your remains of hair and make like you are still in your sixties.

Can you actually add a cogent argument here divorced of personality, or are you simply an ad hominen anon smirky sniper?

Anon 12.18

" the shade of blue in the eyes of the virgin of Guadalupe" may be more relevant in terms of economic dislocation in 2009 than the upcoming bond dislocation, which may not occur until 2010, as it forms the psychological and social matrix of the current suckers' rally in which the banksters will clean out the last of the middle class savings and pension funds.

While I am greatly interested in the details of the upcoming bond dislocation, and have repeatedly begged Stoneleigh to give us an in depth analysis, I am not qualified to give a meaningful, in depth opinion. Quantitative easing, as Denniger puts it, is simply a circle jerk, where central banks try to stave off the inevitable explosion in long term sovereign bond interest rates. Just another attempt to delay the inevitable while the vandals steal the handles.

However, the excessive consumerism, materialism, and hedonism in the vast majority of the US populace has been enculturated by our individualistic society, historically nurtured by a frontier mentality, "rugged individualism," and "manifest destiny" arrogance, and encouraged by advertising and Horatio Alger optimism, and confirmed by a history of imperialism and predatory capitalism.

From birth, people in the USA are bombarded with advertising to consume more junk food, more toys, more cars, more pharmaceutical drugs, to live in bigger houses, and to achieve their materialistic dreams no matter what.

The absence of overt classes in the US (monarchs, priests, nobility, untouchables) is a contributing factor in making the average American gullible to the illusion of self-empowerment and autonomy -- even as they sink beneath the weight of the powerful. People believe that to be happy one needs wealth, one dreams of wealth -- even as they ignore economic and political reality and sink into debt and enslavement to personal pleasures.

Here is another link about Option ARM's (good news but still bad news)

Option ARMs are devilishly hard to refinance. The combination of falling home prices and negative amortization puts most of them significantly under water. Additionally, most Option ARM borrowers are heavily reliant on low interest only payments so attempting to move them to fixed rate amortizing loans often results in significant payment increases. Put simply, these borrowers bought homes that were seriously beyond their reach and no modification short of gifting them significant amounts of equity is going to solve their problem.

I guess one less problem to deal with at this point in time is a good thing. On the other hand, as issues like this hang around, it’s hard to envision a truly robust recovery.el gallinazo, your question:

or are you simply an ad hominen anon smirky sniper?Well amigo shall I put the answer to that to music ? Maybe by some songster from your youth?

I'll try to get to your question as soon as I can. It's just that things are nuts at work right now because of all the simultaneous consultation periods under our new Green Energy Act. It means working days, evenings, weekends etc in order to make submissions to each separate but concurrent process, all of which have short timeframes. I'll shut up about it now or Ilargi will tell me to stop whining again ;)

Anonymous said... This blog, and comments, have really fallen off lately.----- Too much news to try to follow.

Mexico ... CO2 and green fund, (gov. would control investment into solar/windmill mfg for US consumption)

Cuba ... (Expanded export market for US)

US ... cap and trade (would be used to pay off debt and start new energy initiatives)

In anticipation of comments on Obama’s trip, I offer this interesting bit of info.It will be interesting to see which countries will be willing to export mining equipment and mfg facilities in exchange for lithium batteries.See the following http://uk.reuters.com/article/motoringAutoNews/idUKLR15295820090414?sp=true Bolivia holds key to lithium, the battery car metalhttp://forum.atimes.com/topic.asp?TOPIC_ID=15436

I know just how busy you are, and my reference was intended just as a gentle nudge and reminder to put it on the back burner, if you ever have a free moment. I know that there are several others here just as interested in your analysis as I. Actually, something that complicated would be a lot more than a moment. I figure that it will result in double digit long term treasury rates, that the value of pre-existing long term treasuries will fall into a black hole, and it will force the O-man to scrap all his bogus projected social programs including most or all of social security and medicare, but beyond that, I can't figure out much more. I need your high octane brain. Mine is over 60 and worthy of mockery for that alone :-)

Not all comments, just some:-> At least you were good for a laugh, if that's any consolation.

"Here's a significant piece of news that's been ignored:"

It's been "ignored" because there's nothing significant about it. I've never denied that $12.8 trillion buys America some time, and this article falls square into that category. Still, nothing real has moved one inch, no penny in debt has been paid off. In fact, it's all just accumulating additional interest due. The debt is growing as we speak.

If you still don't get that, I suggest keep reading me. Then again, if you need your happy days too much, what can I say? Read the BW cheerleading crew.

No matter who you read, you can't escape that the longer we delay what's due, the harder we will fall. And that includes you.

For those who've noticed the spacing problems, I just tried some things. If you want a full separation between lines, add (br)(br) in between the two, where of course the ) and ( are replaced by > and <.

These can occasionally be unwound and reversed through some types of proper cognitive therapy.Pavlov style?

@ Ahimsa

"a contributing factor in making the average American gullible to the illusion of self-empowerment and autonomy -- even as they sink beneath the weight of the powerful. People believe that to be happy one needs wealth, one dreams of wealth -- even as they ignore economic and political reality and sink into debt and enslavement to personal pleasures."Say it louder! "A man's wealth is determined by how much he has - not how much he spends"

“I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed,” Volcker said.

More said on Calculated Risk, but what I want to know is, where have those black little lambs in the back room gone astray in holding to that act? Is it at all possible for them to be put up for the lamb chop?

Now lets see if (br)(br) chops this to a fine on publication.

Anon 3:06, oh, really?! Myself I read that as borderline apoplexy, which can be fun, especially if one is heavy into bear baiting.

No. I was thinking quite the opposite; through insight therapy; through the Eureka moment. Pavlovian conditioning works equally with humans and annelids. Few humans and fewer annelids make progress through insight, but it is possible.

Bigelow

SDS in my 20's and SDS in my 60's. I feel that I have come full circle :-)